Self-employed must switch to personal pension

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People with the old-style pensions for the self-employed will have to switch into a personal pension if they want to put off converting their pensions savings into a regular income for life.

The freedom to postpone buying an annuity until age 75 was part of the Budget, and further details were announced this week.

It was confirmed that the facility to take an income will apply only to personal pensions. So holders of the old retirement annuity contracts (226s) will have to switch to a personal pension on retirement to gain the advantage.

The Inland Revenue explained that it decided to take this approach after being reassured that the majority of pension providers would allow holders of old-style plans to switch to their personal pension without a charge. Equitable Life and Prudential confirmed that they would make no charge for a switch .Guardian said there would be a £150 administration charge.

William Burrows, a director of Annuity Direct, said that for some people it would not be worth switching to a personal pension to gain the flexibility.

One of the main differences between the two types of pension is the amount that can be taken as a tax-free lump sum. For personal pensions it is a flat 25 per cent, but for retirement annuities the amount increases according to the age of retirement. Someone retiring at 60 could take about 22 per cent of the pension savings as a lump sum, a 65-year-old 26 per cent, a 70-year-old 30 per cent and a 63-year-old 33 per cent.

Mr Burrows said: "If someone was 70 I would feel very uncomfortable about recommending switching to a personal pension for a flexible annuity."

But for younger people where the scope for getting the decision about an annuity wrong is much greater the balance lies with taking the option to put off fixing the income.

The recent period of low interest rates and hence low annuity rates has meant that anyone retiring was forced to lock into those low rates for the rest of their life.

Apart from the freedom to try to avoid periods of low rates when setting retirement income, the freedom to defer the decision on whether to take a widow or widower pension and whether to accept a lower starting pension in return for regular upratings or inflation -proving could be even more valuable.

There will be a tax charge of 35 per cent on cash in the pension on death. John Moret, head of marketing at Provident Life, which pioneered the idea of flexible annuities, said: "This proposal conflicts with the favourable tax treatment of death benefitspreviously accorded to all approved pension schemes."

The tax charge recognises that if the money was paid out as a pension it would be subject to tax.

Annuity Direct has a free leaflet on flexible annuities. Call 071-375 1175 for a copy.

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