Pension changes now in force
- New rules that allow savers to take more cash from their pensions came into force on 27 March. The changes will allow more savers with small pensions to take their pots as cash and enable investors using drawdown arrangements to take a higher income.
- Savers with pensions worth up to £30,000 can now take the money as cash. They will also be able to take three funds worth up to £10,000 as cash, as well. Under the old rules, only two pots worth up to £2,000 could be cashed in.
- Of the money you cash in, 25% can be taken tax-free with tax charged on the remainder at your marginal rate. Ivan Lyons, MD of Investment Solutions said the change will spare savers from buying poor-value annuities that could only pay a few pounds every week.
"Reforming the small pots rule will help to unlock improvements right across the pension system," he explained. "Small investors will get their money back; insurers will be able to sell better value annuities to large customers and it will help to minimise auto-enrolment opt-outs."
- The income drawdown rules have also been relaxed. The level of income investors can take has been increased from 120% of what they would have been able to achieve with an equivalent annuity, to 150% – enabling them to draw down more cash from their pension.
These limits do not apply to investors in flexible drawdown, where there's no limit on the amount you can draw from your pension scheme in any year. However, to qualify you had to be in receipt of a guaranteed income of £20,000 a year – this has been reduced to to £12,000, benefiting around 85,000 pensioners.
However, the above rules may well be further amended or removed entirely after the government has consulted on wide-reaching changes it intends to implement in April 2015.
Lyons added: "If in doubt, investors should review their current retirement income plans. For many people, an annuity will still be the right answer. However, we expect insurance companies to be forced to work a bit harder for investors' money."