The most fundamental change in the way people access their pension in almost a century has been announced by the Chancellor of the Exchequer George Osborne in his Budget speech.
The Chancellor set out that by removing the effective requirement to buy an annuity, people will have greater flexibility in accessing their pensions.
This means that people can choose how they access their defined contribution pension savings; for example they could take all their pension savings as a lump sum, draw them down over time, or buy an annuity.
Alongside this, the government is introducing a new requirement for pension providers to make sure that everyone retiring with a defined contribution pension pot receives free and impartial face-to-face guidance on the choices they face when deciding how to use their retirement savings.
The government has today published a consultation on how best to implement these changes, which will be introduced from April 2015.
In the meantime, as a first step towards this reform, the Chancellor has announced a number of changes to the current rules that will come into effect from 27 March 2014. This will allow people to have greater freedom and choice now over accessing their defined contribution pension savings at retirement. These are:
- reducing the amount of guaranteed income people need in retirement to access their savings flexibly, from 20,000 to 12,000
- increasing the amount of total pension savings that can be taken as a lump sum, from 18,000 to 30,000
- increasing the capped drawdown withdrawal limit from 120% to 150% of an equivalent annuity
- increasing the maximum size of a small pension pot which can be taken as a lump sum (regardless of total pension wealth) from 2,000 to 10,000 and increasing the number of personal pots that can be taken under these rules from two to three
Supporting savers at every stage of their lives
Alongside these major reforms to how people access their pension, further measures have been announced to support savers at every stage of their lives.
This includes reducing taxes for the lowest income savers, radically increasing the flexibility of Individual Savings Accounts (ISAs) and introducing new products to help retired savers achieve a better return on their investment.
From 1 July 2014 ISAs will be reformed into a simpler product, the New ISA (NISA), with an overall limit of 15,000 per year. The government is also abolishing the rule that says only half can be saved in cash.
This will give savers complete flexibility to save or invest how they wish, and will benefit over 6 million people previously constrained by the cash and or stocks and shares limits.
The government will also raise the limits for Junior ISAs and Child Trust Funds from 3,720 to 4,000.
Premium Bonds, offered by National Savings and Investments (NS&I), are one of the oldest and best known savings products, held by over 21 million people.
The Chancellor has announced at Budget that the cap on investments in Premium Bonds will be lifted for the first time since 2003- from 30,000 to 40,000. This will come into effect in June 2014.
NS&I will also offer two 1 million prizes per month, rather than one, from August 2014. In the financial year 2015 to 2016 the investment limit on Premium Bonds will be increased to 50,000.
Abolishing the 10% rate of tax on savings income
For low income savers the government is also announcing that it will abolish the 10% rate of tax on savings income, and replace it with a new 0% rate.
The government will also increase the amount of savings income that can benefit from the new rate, from 2,880 to 5,000 in April 2015. This will ensure that lower earners dont pay tax on their savings income.
For people aged 65 or over
For people aged 65 or over, the Budget announces that National Savings and Investments (NS&I) will launch a choice of two fixed-rate, market-leading savings bonds, available from January 2015. These will provide certainty and a good return for those who have saved all their lives and now rely on their savings for income.
While the exact details of the bonds will be finalised in the autumn, the governments current assumption is that NS&I will offer products which would pay rates of 2.8% gross/annual equivalent rate (AER) on a one year bond and 4.0% gross/AER on a three year bond under current market conditions, with an investment limit of 10,000 per product. These will be taxed in line with all other savings income.
Find out more about the 65+ Guaranteed Growth Bonds.
The Budget also announces further details of a new scheme of Voluntary National Insurance contributions (VNICs) to allow pensioners to top up their Additional State Pension.
The scheme will be introduced in October 2015 and will be open for 18 months. It will be available to everyone reaching State Pension age before 6 April 2016.
This will help pensioners with savings who want to boost their State Pension income.
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