George Osborne’s Budget in March changed the entire landscape for retirement and saving.
Here at MoneyWeek, we’re delighted by the chancellor’s changes.
For too long, the pensions industry has ripped off ordinary people. Charges have been too high and the performance has often been rotten.
Which is why March’s Budget was such great news.
George Osborne’s changes make the system much more flexible. He’s trusting pensioners to manage their own money.
But with this greater freedom comes more responsibility and higher risk. So it’s vital you understand what your options are under the new system. Then you can make the right decision for you.
Which is why we’ve put this guide together to explain all the ins and outs of the big changes.
This guide is mainly aimed at people who are planning to retire in the next year or so, but you’ll probably still find it useful even if you’re further away from retirement.
So, let’s get started.
1. Who do the changes affect?
Osborne’s changes affect anyone who is saving into a ‘defined contribution’ pension. That’s a pension where you gradually build up a pension pot during your working life.
Traditionally most people have used their pots to buy an annuity when they retired. However, under the new plan, no one is under any obligation to buy an annuity at all.
In fact from April 2015, you’ll probably be able to take out all the cash from your pot in one go. That’s as long as you’re 55 or older. (George Osborne is currently consulting on this proposal, so it’s possible we’ll see minor amendments before next April but major changes are very unlikely.)
And that’s not your only option. For example, you could decide to put your pot into ‘income drawdown.’ In fact, with income drawdown, you might be able to withdraw all the money from your pot right now.
In this pension survival guide, we’re going to explain all the different pension options and we’ll highlight the pros and cons for each one.
Don’t assume that taking all your money out in one go is definitely best for you. It will work well for many people but you may end up paying too much tax or take too much risk.
Make sure you make an informed decision. After all, if you get it wrong, you could regret it for the rest of your life.
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2. What if you’ve already bought an annuity?
If you’ve already bought an annuity, you’re probably stuck with it.
However, if you’ve bought an annuity in the last two or three months, you may be able to cancel your purchase. It’s well worth contacting your annuity provider to see if you can do this.
If you’re able to cancel your annuity, you can then sit down and work out what’s best for you.
And if you’re unable to change your current annuity, remember that at least you have a secure pension income for the rest of your life. Annuities aren’t all bad. (We’ll expand on this point later in the guide.)
3. What if you have a final salary pension?
If you have a final salary pension, you’re not affected by these changes.
With a final salary pension, you’re paid a percentage of your salary for the whole of your retirement. More often than not, final salary pensions rise in line with inflation, so they’re very attractive for employees.