A month of change for pensions

by Bob Bullivant on 01 April 2011  |  3 comments
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There are lots of changes to pensions coming up in April - so what does it all mean?

First up is the news that pension increases within occupational schemes may be changed to come into line with the consumer price index (CPI) - as opposed to the currently assessed Retail Price Index (RPI).

The mechanics of this process are complex – but for the layman this effectively means the rate of increase for pensioners will in future be less.

From a pensioner's viewpoint this is a big issue but is there a potential benefit?

The only one I can spot is a reduction in pension liabilities for final salary schemes ––as they will have a lower deficit and therefore greater security. This is important as the last thing a pensioner wants is for their pension fund to be insolvent.

The big news though is the removal of the requirement to buy an annuity at age 75. This has been in great demand for many years but there are a lot of stings in the tail.

Firstly the maximum amount that can be taken from a so called ‘drawdown’ fund will reduce from 120% of a predetermined rate to 100% of a lower rate.

Predetermined rates are known as GAD – government actuarial department rates.

This will reduce the maximum income from drawdown at next review unless you have £20,000 of secure (pension) income in which case you can take as much as you like - but remember the income is taxed and so this could mean 20%, 40%, or 50% of the income taken disappearing to the taxman.

Is this a realistic option for most people I ask myself?

If that were not bad enough there is a further sting in the tail on death. If you die in drawdown the taxman will take 55% of the fund. If you die before you take benefit (crystallize your fund) then there is no tax until you reach age 75 when the 55% tax rate kicks in again on non-crystallized funds.

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So what does all this newfound flexibility mean? First of all for those now using drawdown they will almost certainly see a reduction in the maximum amount they can withdraw from the next review which takes place every five years.

They will need to consider if they qualify to take whatever they like from the fund by having a minimum pension income of £20,000 p.a.but in doing so they will also need to think about income tax. It is far too early to predict but a review of the annuity market will also be in order linked to a look at tax rates post death.

Remember also that annuities come in many shapes including those which link to stock market funds so a good look around is definitely in order. An annuity does not necessarily have to be guaranteed!

The government has given all of this new found flexibility - albeit at a price. What it has not done is to force insurance companies to advertise the ability to shop around more openly. Currently around 40% of people shop around meaning that 60% cannot be sure they have the best rate and benefit combination. The net result is less tax revenue and potentially higher DWP expenditure. In these straightened times this just seems bonkers!

Bob Bullivant is the chief executive officer of independent retirement planning specialist Annuity Direct. For more, visit their website, or call 0500 50 65 75