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Budget Speech 2014: Pension pot reforms

by Mike Abbott | Apr 14, 2014
  • In his 2014 Budget Speech, George Osborne announced a radical reform that considerably increased the flexibility for pension savers on retirement. In the words of Osborne himself, “No one will have to buy an annuity anymore.”
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    This is significant and demonstrates that the Chancellor has learned from the lessons in 2009 when thousands of pensioners saw their pension pots reduced in value as financial markets crashed, only to be forced to them by an annuity at the lowest annuity rates in record as interest rates fell to the floor. The understanding for the need to provide flexibility at this juncture in the financial life cycle has reached the political consensus. 

    These reforms remove one of the last remaining obstacles we face as advisers in convincing people of the value of pension saving. Lack of flexibility on taking income at retirement has put many people off pension saving; as a consequence, these people are losing out on the considerable benefits of tax-free growth and income tax relief that pensions provide. Retirees haven’t had to buy an annuity for some time now, but they have been capped on how much they could draw out of their pensions. 

    As of April 2015, retirees now have the option to take the pot in its entirety, as long as they pay a marginal income tax rate when they withdraw the funds. They can still withdraw a quarter of their pension pots tax-free upon retirement, with the rest being taxed at normal marginal tax rates – the same as any other income. It’s also worth remembering that pensioners over 65 have income tax allowances, so they pay slightly less tax for a given amount of income than a younger person. 

    Chancellor Osborne regards this reform as the biggest to affect pensions since 1921, and one that will address the perception that easy access equates to reckless spending. “13 million people have defined contribution schemes, but most people still have little option but to take out an annuity, even though annuity rates have fallen by a half over the last 15 years. The tax rules around these pensions are a manifestation of a patronising view that pensioners can’t be trusted with their own pension pots,” says Osborne.

    According to Osborne, “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.”


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