Pension shakeup

Pensions are changing

A few of my previous articles have been about the changes to economic policy following George Osborne's budget speech on 19 March 2013. One of the biggest outcomes following that speech was the changes made to Pensions.

Pensions Previously

I previously explained that Government policy meant that when you came to retirement you were forced to take you pension pot and buy an annuity that would pay you an income for life. There was some flexibility in the scheme. You were able to up to 25% of your pension pot tax free as cash before purchasing your annuity. You were also allowed to choose your annuity provider. There were also different types of annuities.

Pension shakeup

The big change to the pension system is that you no longer have to buy an annuity. You now have the freedom to choose where to put your money when you retire. When you come to retirement you still have the option to take out 25% of your pension pot as cash tax free. However, whilst you may still wish to buy an annuity, you can now take your money out of your pension pot and invest it into the stockmarket or buy an investment property with the cash. You could even buy a Lamborghini with the money , assuming you can afford it! Unfortunately, the drawback to doing this is that whatever you take out of your pension pot will be taxed at your marginal rate of income tax i.e. If you are a higher rate tax payer then you will pay 45% tax on any money that you take out of your pension.

I will discuss in a following article what you should do with your pension.

What will happen to the annuity market?

Many have predicted that the annuity market will crumble. Some have suggested that the market for annuities will shrink by as much as 90%. Insurers such as Aviva reacted by shrinking by as much as 5% (as quoted on the stockmarket), suggesting that investors agreed with this sentiment. I'm not so pessimistic. There will always be a place for annuities. 

I believe that the shakeup to the annuities market such that there is no legislated demand will definitely cause a fall in the demand for annuities. It is hard to predict by how much. However, I am fairly certain that the changes will cause an increase in the attractiveness (or price) of annuities as insurers compete to attract investors who are otherwise strongly tempted to take their pension as cash. This is simple supply an demand. As demand falls for an item, assuming that nothing else changes, the price should go up. I actually believe that these changes will make annuities more attractive.

What if I already have an annuity?

Unfortunately if you already have an annuity then you're too late to change it. The only exception to this is if you purchased your annuity within the last 30 days. If this is the case then you can still change your decision.

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The Wallet Doctor said...

Interesting news! Do you know if there was a lot of debate surrounding giving people the opportunity to choose whether to buy an annuity or not? Its always good to know all the options you have as you head toward retirement!

Mr. Moneybanks said...

Hi Wallet Doctor - loads of debate! It's quite a revolutionary idea. It gives people ultimate freedom on what to do in their retirement.