Pensioners to take advantage of flexible pensions
08/08/2014
Over a third of pensioners will take cash out of their pension fund when new rules come into effect in April 2015, according to H M Revenue and Customs.
That will mean an estimated 130,000 people will take advantage of the changes to the pension system, which were announced by chancellor George Osborne in his 2014 Budget speech.
These changes mean that those aged 55 or over have more flexibility over what they do with their pension funds. The added flexibility means that people are no longer forced to trade their pension fund in for an annuity – which is a pre-set income for life.
Instead, people have been told that they can do whatever they like with their pension fund, including drawing it all out as a cash lump sum. Although it’s worth noting that only 25% would be tax-free, with the rest taxed at the marginal rate.
Downsides
Tom McPhail, head of pensions at Hargreaves Lansdown warned that although the changes are a huge step forward, people need backing with “the right guidance and advice”, as he said that “tax could easily wipe out a sizeable chunk of people’s pension savings”.
There are also fears that some people would blow their pension savings on material items such as a sports car. However, Paul Green, from Saga disputed these claims as he said that a study they conducted found very few people would do this.
The study of 2,400 people aged 50 or over found that 15% planned to cash in their entire pension fund, while only 23 people would spend it frivolously.
He said: "Over half say they plan to use funds to secure a future income for their retirement. It is vital that people are properly advised about the tax implications of withdrawing more than 25% of their pension pot before they do something that they may live to regret."
Annuity sales
As the new rules mean that people are no longer forced to buy an annuity, sales of the retirement product have fallen by 41%, with further declines in the market expected.
Legal and General said that sales would fall by a further 50% in both the second half of the year, and in 2015. However, HMRC still believe that two-thirds of people will either buy an annuity or bide their time, leaving their pension fund invested for the time being.
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