Chancellor George Osborne has rocked the annuities market to its foundation by stripping away all caps and limits on drawdown in today’s (19 March) Budget.
Mr Osborne said: “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want.
“No caps. No drawdown limits. Let me be clear: no one will have to buy an annuity.”
Among the sweeping changes to the way people fund their retirement, 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 a lump-sum small pot to £10,000; and
• increase the overall size of pension savings that can be taken as a lump sum, from £18,000 to £30,000.
In the most sweeping change, Mr Osborne announced savers will no longer face the 55 per cent penalty charge if they try to take the rest of their pension after their tax-free lump sum, but will rather be taxed at marginal rates - meaning as little as 20 per cent for most pensioners.
The move could be a huge blow to annuity providers, as it means savers can effectively can their whole pension as cash. Share prices of many listed annuity providers nose-dived in the immediate aftermath of the announcement.
Mr Osborne said the move showed the “trust” the government had in savers and will head off concerns over access to money that put some off saving, but some commentators were already signalling caution about the need for individuals to keep funds aside to fund their retirement.
Stephen Lowe, group external affairs and customer insight director at enhanced annuity provider Just Retirement, tweeted: “Careful. [People] have to fund a secure retirement [income].”
All of the changes apply only to defined contribution pensions. Mr Osborne said changes could be brought in which would affect defined benefit schemes and bring rules into line with the reforms announced today, but that this would have to be legislated separately.
Mr Osborne also made promises to help every retiree shop around for the option best suited to them by providing access to “face-to-face advice”.
He said: “We’re going to introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have.”
He added that £20m will go towards government work with consumer groups and the industry to develop the new “right to advice” proposal.