“No one will have to buy an annuity,” the chancellor of the exchequer, George Osborne, announced in his penultimate Budget before the next election.
In the biggest array of pension reforms in the market since 1921, Mr Osborne said the tax rules around defined contribution (DC) pensions are a “manifestation of a patronising view that pensioners can’t be trusted with their own pension pots”.
The government has announced the introduction of a guarantee, that anyone who retires on a DC pension will be offered ‘free and impartial’ guidance on how to get the most from the choices they will have.
“Those who still want the certainty of an annuity, as many will, will be able to shop around for the best deal. I am providing £20m over the next two years to work with consumer groups and industry to develop this new right to advice,” Mr Osborne said.
Charges on lump sum pots will also have drastic changes. In transformations that come into effect on 27 March, the government will:
– cut the income requirement for flexible drawdown from £20,000 to £12,000
– raise the capped drawdown limit from 120 per cent to 150 per cent
– increase the size of the lump sum small pot five-fold to £10,000
– and almost double the total pension savings you can take as a lump sum to £30,000
As a consequence of low interest rates, pensioners have seen a fall in income, but the Pensioner Bond - available from January 2015 - will be issued by National Savings and Investments and open to everyone aged 65 or over. Exact rates will not be announced until the autumn, but the government assumption is 2.8 per cent for a one-year bond and 4 per year for three years.
But it is not just those of pension age the Budget has helped. Isas will be made simpler, by merging cash and stocks Isas into one.
They will be more flexible, allowing savers to allocate to both shares and cash in one product, and the annual limit will be raised to £15,000 from 1 July 2014. The limit from Junior Isas will also be raised to £4,000 a year from £3,600.
While the pension reforms in particular may have been somewhat unexpected, many will be left asking who will provide the guidance - and who will be footing the bill - and questioning what will happen to the annuity market.
Ruairidh Finlayson, equity analyst at Brewin Dolphin, said “The rules will not destroy the annuity market as many individuals are still likely to buy annuities to provide a predictable income for their retirement.”
“[The providers] should still be able to benefit from the legislation by picking up some of the new business created though other savings and investment products,” he added.
After the announcement, the markets saw extreme reactions. Just Retirement’s stock plunged by 42 per cent, while Partnership Assurance Group fell by 55 per cent by the close of the day.
charlotte.richards@ft.com
