The 2015 pension changes have been put in place and are deemed to revolutionise the way we take an income in our retirement. This change ultimately scraps the need for most people to buy annuity. Now, savers are free to take their entire pot – in a single lump sum. They are also able to withdraw money straight from their account when need be.
The Lifetime Allowance
Chancellor George Osborne announced that he will be cutting what he referred to as the ‘unsustainable’ lifetime allowance. This is the maximum amount of money that is able to be saved on a pension (from £1.25m – £1m).
The cut to the Lifetime Allowance has worked out to be quite a blow to higher earners. Osborne has stated that it will affect less than 4% of the country. The pension holder pays 55% tax charge on any given amount over the lifetime allowance when they take a pension commencement lump sum.
It was also announced that from 2018 the Lifetime Allowance will increase in line with inflation. It has been argued that the limit placed on pension saving will directly punish those who save early and have the most success in investment.
To quote Greg Kingston of Suffolk Life pension firm:
“Talk of a pension lifetime allowance of £1m will seem meaningless to a 21 year old on the increased minimum wage of £6.70 an hour. Yet if that 21 year old works a 35 hour week and manages to put 20pc of their earnings into a pension then by the time they reach the age of 67 they could easily have reached this limit.”
Cutting the Lifetime Allowance has previously been pushed by the Liberal Democrats and the Labour parties. Labour has also mentioned cutting the annual allowance however Osborne made no mention of this.
The Re-selling of Annuities
From April 2016 the government is changing tax laws to allow people who receive annuity incomes to sell said income to a third party – this is subject to an agreement with their annuity provider.
This is excellent news for those who have missed out on the pension freedoms. In the past few years annuity rates have been poor and the recent retirees feel side-lined as they were forced to buy low value products that pay a small income.
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