Budget scraps rule that makes annuities compulsory at 75
Pensioners now have more choice as to how to fund their retirement. Chiara Cavaglieri explains the pros and cons of the different options
Sunday 27 June 2010
After months of speculation, the coalition government announced in the emergency budget that it would scrap the rule that makes it compulsory to turn a pension pot into an annuity by the age of 75.
The rule change comes in next April, but the age limit has been raised to 77 with immediate effect to draw in those turning 75 before April. The tax payable on a pension pot on death has also been reduced to 35 per cent, ahead of a consultation detailing the changes.
Under previous rules, people reaching 75 had two options; they could either buy an annuity or take an alternatively secured pension (ASP). With the latter previously incurring a punishing tax of 82 per cent on death, most people opted for an annuity.
"The prospect of being forced into a decision with their hard-earned savings was a major psychological barrier that has prevented many people from pension saving. The new rules will allow people to have a lot more flexibility regarding what they do with their pension pots and, more importantly, when," says Hugo Shaw, an investment adviser at independent financial adviser (IFA) Bestinvest.
Savers will now have the choice of either buying an annuity as before, or continuing to run a drawdown plan past the age of 75. With an income drawdown plan, you can take a tax-free lump sum of 25 per cent but the underlying fund can be invested as you see fit, so that it continues to grow.
The benefit of income drawdown is that you can continue to invest and grow your pension, and take an income from it as you need. You can turn your income stream on and off at any time which makes it ideal for people who retire gradually. However, while you can benefit from any increases in the value of the fund, you also run the risk of losing out if the fund value falls. This may become more of a concern as you get older, and so becomes a less attractive option after the age of 75.
It is also unknown at this stage what restrictions the government will put in place, once it has formulated more permanent rules. "They could require people to secure a minimum level of annuity income, perhaps £6,000 a year, and then give them the freedom to do what they like with the rest; or they could impose new drawdown income rules to ensure people couldn't run down all their retirement funds," says Tom McPhail from IFA Hargreaves Lansdown.
Those with a larger fund can expect to benefit the most from the new rules, because they now have far more flexibility as to how to invest their money. Annuity rates have been falling for some time, making them far less appealing. A man aged 65 buying a "level" annuity (that doesn't increase with inflation) with a £100,000 fund would have received an income of around £9,000 a year in 2000, whereas today they would get around £6,450.
Most people take out annuities long before 75, because at that point their life expectancy falls to close to 10 years, and they would struggle to find an annuity rate that would pay out as much as their capital over that timespan. Also, many people buy their annuities from their pension providers, instead of shopping around for the best deal.
Another problem with annuities is that, unlike income drawdown, you no longer have control of your money. In many instances, your partner or dependents are unable to benefit if you die, and the remainder of the fund goes straight into the insurer's pocket.
"The detail we have yet to see is whether this removal of the age 75 rule will include the introduction of a 'money back guarantee' annuity option. This would allow anyone to protect their pension savings from the financial impact of dying early," says Barry O'Dwyer, below, the deputy chief executive of Prudential.
Despite the potential pitfalls, annuities still have their proponents: "For most people, annuities are the most effective way of providing a regular income stream in retirement. For those who need to maximise their income in retirement the debate remains about when to annuitise, not if to annuitise," says Mr O'Dwyer.
Tom McPhail, Hargreaves Lansdown
Investors have long been averse to relinquishing control of their savings by buying annuities and this has deterred people from pensions.
Scrapping the rule that requires pensions to be turned into annuities is a game-changing development because it means that people have control; the more you save in your pension fund, the more freedom you will have and the more control you'll have over your retirement funds.
Even though most people will still end up with an annuity, this will improve the pensions landscape for everyone.
- 1 Tunisia hotel attack: Locals form 'human shield' to protect hotel from gunman Seifeddine Rezgui
- 2 Greece crisis: Alexis Tsipras accepts troika bailout proposals with conditions
- 3 German ethics council calls for incest between siblings to be legalised by Government
- 4 French woman dies in freak bungee jumping accident
- 5 Facebook rainbow profile pictures likely being tracked by social network
The moment a Queen's Guard soldier lost it and drew his gun at annoying tourist
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Pentagon accuses Russia of 'playing with fire' over nuclear threats towards Nato
They are neither a 'state' nor 'Islamic': Why we shouldn't call them Isis, Isil or IS
iJobs Money & Business
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...
Day In a Page
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.