This year will see one of the biggest shake-ups of the UK’s pensions system in decades, with many of the measures announced by Chancellor George Osborne in last year’s Budget finally coming into force.
Perhaps the biggest change announced over the past 12 months is that people will soon have greater power over how they spend, save or invest their retirement pots.
A new dawn
Beginning on the first day of the new tax year on April 6th, the so-called ‘pension freedom changes’ will see savers given access to their entire pension pot from age 55 onwards, while there will also no longer be a requirement to buy an annuity to provide income until they die.
Other key changes will include the provision of access to invest-and-drawdown schemes previously restricted to wealthier savers, as well as the scrapping of the 55 per cent ‘death tax’ on pots left invested.
Another widely welcomed announcement by the Chancellor was that savers will no longer be limited to one opportunity to take a single tax-free lump sum worth 25 per cent of their pension pots, with the rest taxed as income afterwards.
People will instead now be able to dip in and make as many withdrawals as they like, receiving 25 per cent tax-free each time, with the rest taxed like income.
Though the changes largely apply to people with defined contribution or money purchase pension schemes and not those with final salary pensions that provide guaranteed income after retirement, analysts are expecting a great deal of interest from savers, with up to a million people expected to make enquiries about taking advantage of pension freedom in the first three months after launch.
A helping hand
As many of the changes being launched are complex and will have long-term repercussions, the government has pledged to offer free money guidance on the legislation, but this will only be general advice.
For detailed, individual guidance people will still need to turn to an expert, who will be able to assess their individual circumstances and calculate what the best course of action is, based on their current and projected outgoings and financial commitments.
Despite The Pensions Advisory Service providing guidance over the phone and online and the Citizens Advice Bureau doing so face to face, few people are expected to utilise the help and instead will stick to more tailored guidance.
Across the board
The state pension is also set to be directly affected, with pensioners receiving a 2.5 per cent hike in their basic state pension, which will rise to £115.95 a week from April.
Increases in the state pension are determined by the the ‘triple lock’ rule, which means payouts increase by whatever is the highest of inflation, average earnings or 2.5 per cent; a policy that every major political party is committed to maintaining, regardless of the outcome of the General Election.
Longer-term, the existing two-tier system will be phased out from April 2016 and entirely replaced for those retiring after April 2021 by a ‘flat rate’ pension of between £144 and £155 a week.
The Department for Work and Pensions’ new pension statement service will also tell people what they are likely to receive and ways to boost the amount before they retire, with the service initially available to those retiring in the next five years but eventually expanded to everyone.
With one of the biggest pensions shakes-ups in history about to take place, savers and retirees will soon have unprecedented options open to them, but the legislation will also be a double-edged sword: with every decision having major long-term ramifications, caution will need to be exercised to ensure any investment is being done so in the safest and most beneficial way possible.