Q. I am approaching retirement. I am a member of my employer’s group personal pension scheme and I had anticipated using these savings to purchase an annuity. However, I think I’ve heard that the requirement to purchase an annuity has been abolished. Is this correct?
A. Yes.
The Chancellor of the Exchequer, George Osborne, delivered his budget speech last Wednesday during which he announced, arguably, the most radical and unexpected policy change of his four-year tenure.
Mr Osborne stated that, with effect from April 2015, fundamental changes will be introduced to the manner in which the majority of retirees are able to take their pension income and that “no one will have to buy an annuity”. Instead, retirees will be able to access their define contribution (“money purchase”) pension savings in any way they see fit – even withdrawing the entire sum if they so wish – subject to their marginal rate of income tax.
Mr Osborne’s announcement extends previous changes introduced by the coalition government, who have removed the requirement to buy an annuity by age 75 and have introduced the concept of “flexible drawdown” (for those pensioners who can demonstrate a guaranteed income of a prescribed amount).
Although it was possible, prior to the budget, for a pensioner to decline to purchase an annuity and, instead, draw an income from their pension savings, the amount of income they were able to take was, for the majority of pensioners, limited by reference to factors established by the Government Actuary’s Department.
Mr Osborne also announced an immediate relaxation of the drawdown rules, increasing the maximum amount of income pensioners may withdraw who are utilising capped drawdown and reducing the minimum income pensioners must demonstrate to take advantage of flexible drawdown from £20,000 to £12,000.
Whilst the Chancellor stated that he expects that the majority of money purchase members will still elect to purchase an annuity at retirement, this does not appear to be a sentiment shared by the markets. Some insurers saw their share prices decline significantly – as much as 50% in one instance – following the Chancellor’s announcement. This reflects the market’s sentiment that life companies could see a 50% reduction in annuity sales as a consequence of the reforms (more than 75% of pensioners opt to purchase an annuity at present).
Q. I was on holiday last week and, as such, I missed the news coverage in respect of the budget. Please can you tell me if the personal allowance was increased and/or whether there were any other announcements that might have a positive affect on my net income?
A. The Chancellor of the Exchequer, George Osborne, delivered his annual budget last Wednesday.
We knew that the personal allowance (the amount a person can earn before paying income tax) was set to increase from £9,440 to £10,000 with effect from 6 April 2014 (as the Chancellor had announced this during his Autumn Statement, delivered in December 2013). This means that the coalition government will reach its target of raising the personal allowance to £10,000 one year ahead of its stated target.
However, the Chancellor announced last week that the personal allowance will increase further, to £10,500, with effect from 6 April 2015. This will mean that the personal allowance has risen by more than £4,000 (from £6,475) during the coalition government’s five-year term of office. Consequently, a worker earning the national average income will pay approximately £800 less in tax each year and more than three million low-paid workers have been lifted out of income tax completely.
If you are a higher rate tax payer, there was some good news for you also. Mr Osborne announced also that the higher rate threshold, above which income tax is paid at a rate of 40%, would increase for the first time during this parliament. The higher rate threshold will rise by £415 to £41,865 with effect from 6 April 2014 and by a further 1% to £42,285 with effect from 6 April 2015.
Q. I am retired. I have significant savings but very little other investments (as I am very risk-averse). Historically, I have been able to live off the interest produced by my savings, but this has not been the case in recent years with interest rates being so low. Was there any good news for me in the recent budget?
A. Yes. The Chancellor, George Osborne, announced a couple of changes during his budget that ought to be welcome news to savers.
First, Mr Osborne announced that the 10% starting rate – payable on the first £2,790 of savings income above the tax-free personal allowance – will be reduced to 0%. Secondly, Mr Osborne confirmed that the amount of savings income a person can receive that will be subject to the newly reduced 0% rate will increase from £2,790 to £5,000.
The government anticipates that the changes will benefit approximately 1.5 million taxpaying savers, with an average benefit of more than £150 per year.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
