The Chancellor today announced dramatic changes to the rules surrounding defined contribution (DC) pensions.
While the tax regime currently obliges most people to buy an annuity with their pension savings, Mr Osborne promised full access to pension pots and complete freedom about how these are used.
Those who elect to buy an annuity will be offered free impartial advice and encouraged to shop around for the best deal. Mr Osborne has committed £20m to implement this change.
Watch our response to Budget 2014 in the Which? Money Podcast video special
New freedom for pension savers
Introducing what he called ‘the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921’, Mr Osborne said: ‘Most people still have little option but to take out an annuity, even though annuity rates have fallen by a half over the last 15 years.
‘The tax rules around these pensions are a manifestation of a patronising view that pensioners can’t be trusted with their own pension pots.
‘I reject that. People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances.
Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits’.
Go further: Budget 2014: The highlights – Which? rounds up the key announcements
While the most radical of Mr Osborne’s reforms require legislation and will not be introduced until April 2015, some changes will take effect from 27 March 2014. These concern small pension pots and trivial commutation.
Responding to complaints that those with small pension pots were unfairly forced to buy a low-paying annuity by ‘trivial commutation’ rules, Mr Osborne has raised the limit at which you can instead take your pension savings as a lump sum from £18,000 to £30,000.
Further rule changes will allow those with ‘stranded’ small pots to take these as cash. The current limit of £2,000 will be increased to £10,000, and increased from two pension pots to three pots.
Income drawdown changes
Also from March 27, pensioners using ‘capped’ income drawdown will be able to take 150% of the income they could get from an annuity.
People that qualify for flexible drawdown will see the minimum income they need to have reduced from £20,000 to £12,000.
Go further: Annuities explained – how to turn your pension fund into an income
New Pensioner Bonds
A further boost to pensioner finance was given by the government’s scheme to introduce new pensioner savings bonds from NS&I.
Available to those aged 65 and above, these will be one-year or three-year bonds offering ‘certainty and a good return’. They will be on offer from January 2015.
State pension top-up scheme confirmed
The 2014 Budget confirms that new voluntary National Insurance contributions (NICs) will allow existing pensioners to get higher state pension from April 2016 onwards.
To boost your current pension you’ll need to make a one-off payment. The scheme begins in October 2015 and will run for 18 months.
The provision is intended to bring those already claiming state pension into line with people who reach state pension age after April 2016 and receive the new single-tier state pension.
Go further: State pension explained – what is the state pension and who is entitled to it?