Ask the expert: changes to pension rules
Updated 13 March 2018
Coming up to retirement and want to know whether the new pension rules will affect you? What if you have a small pension pot? Carl Lamb explains.
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Q. I have been reading the news about the changes to pension rules on buying an annuity in the Budget this year and wonder if this is going to help me.
I am ready to retire – I am 60 – and I have just one pension fund of around £40,000. Is it worth me buying an annuity?
Carl Lamb, Almary Green:
A. Certainly, annuity rates at the moment are fairly low, so your fund of around £40,000 will currently only generate an annuity of around £1,600 per year. That’s assuming that you take your entitlement to a tax-free lump sum of 25 per cent of the fund and take an income just for yourself with a ten year guarantee built in. If you’re married and want to provide a widow’s pension at 50 per cent of the full pension, then the annual figure you might achieve in an annuity is likely to be nearer £1,500 per year.
“The more significant change will happen in April 2015. From that date, you will be able to draw money direct from your pension pot as and when you need it”
Under the new rules that have just come into force and which will apply to the 2014/15 tax year, if the balance of your fund is under £30,000 and you are over 60, you may withdraw it as a lump sum – this is known as “trivial commutation”.
If the balance of your fund is £30,000 or over, then you can either buy an annuity or enter into “pension drawdown” and take an income direct from the fund. That income is restricted according to the type of pension drawdown contract you select, although the rules are now more favourable following the Budget. I recommend that you get specific advice if you want to go down this route, as it isn’t suitable for everyone.
“You certainly now have some new options and it may well be worth delaying taking your pension until April 2015, if you can, to take advantage of the increased flexibility”
The more significant change will happen in April 2015. From that date, you will be able to draw money direct from your pension pot as and when you need it (provided you are aged 55 or over) – so you could in theory take it all out in one go and either invest it or spend it. However, you must remember that whatever you take out of your pension fund will be classed as income and taxed accordingly (although you do get 25 per cent of the fund free of tax).
The Chancellor has certainly given you some new options and it may well be worth delaying taking your pension until April 2015, if you can, to take advantage of the increased flexibility on offer. Investing the proceeds of your pension fund in a balanced portfolio to generate retirement income is one option but you must understand the element of risk that will be involved. An annuity will generally provide a secure income, and you need to balance that against the potential for higher returns elsewhere. As always, I recommend that you sit down with an adviser and look at all the possible options to work out which is best for you.
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