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New freedoms - and liberated annuities

This article is part of
Guide to Annuities Post-Pension Freedoms

Most media interest around the Budget and the subsequent stream of elucidations and clarifications was the fact that from April 2014, a person could access their entire pension pot as cash, subject to their personal tax rate.

Historically Alistair McQueen, pensions manager at Aviva UK, says it has been a requirement to use at least three-quarters of your pension fund to secure an income in retirement, often by purchasing an annuity.

As part of this year’s Budget, such restrictions were removed. From April 2015, your clients will be able to access your entire pension fund and use it as they wish, with 25 per cent tax free and the rest simply taxed as income.

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Mr McQueen says: “Using the government’s language, you will have freedom and choice to manage your money in retirement as you see fit.”

In the interim period before April 2015, people were told they could only access their pot as cash if their pensions fell into the small funds category - boosted to three funds of £10,000 or less - or if you were able to trivially commute modest combined pension savings - also upped to £30,000.

In addition, the maximum amount that can be taken out each year from a capped drawdown arrangement was increased from 120 per cent to 150 per cent of an equivalent annuity, while flexible income could be achieved with a reduced minimum income from other sources of £12,000.

The six-month rule was also relaxed to allow customers to take their pension commencement lump sum and defer the decision over the remainder of their benefits until the new rules came into force.

Annuity freedoms

With the prospect of added freedoms, Mark Stopard, head of product development at Partnership, says some customers are choosing to defer taking out any products until they know more about what products will be on offer from April 2015.

And it is not just alternatives to annuities that will be the new kids on the block; annuities themselves are changing too as a result of freedoms announced in the wake of the Budget to level the playing field a little.

Mr Stopard says the main features of a ‘lifetime annuity’ under the current rules are that it is provided by an insurance company, payable for life and cannot decrease, except for investment-linked annuities which can follow the value of specific investments or an investment index.

Dependants’ pensions have a guaranteed payment period of a maximum of 10 years, and value-protection - return of premium less payments made to date - are the only authorised death benefits.

From April 2015, annuity rules will largely mirror drawdown rules and offer much more flexibility.

For example, Mr Stopard says in addition to the option of an annuity that increases over time, lifetime annuity income will be able to be reduced and products will even be able to pay lump sums at selected points, to enable products to be adapted to phased retirement plans.

Death benefits will also become more generous with the rules eased to allow extended guarantee periods beyond 10 years. Value protection lump sums will also, like drawdown pots, not attract the death charge of 55 per cent.