In the latest of the series of major pension announcements, the Chancellor of the Exchequer today confirmed his plan to extend pension freedom to about 5m people who have already bought an annuity.
Cashing in your annuity
If you already have an annuity – an insurance product which gives a guaranteed annual income until death – you will be allowed to trade it in for a lump sum without a tax penalty from April 2016.
The Chancellor announced that there will be a consultation on the measures needed to end restrictions on buying and selling existing annuities, and on the right level of guidance and advice for those who want to sell.
Those who do sell will potentially get a lump sum, or may put the money into an income drawdown product – which allows them to withdraw amounts as they need them – so they can access the funds more gradually.
Currently those who want to sell their annuity to a willing buyer have to pay tax of at least 55% of the value of the annuity – and in some cases the amount is up to 70%. This charge will be removed, so those who sell are taxed only at their ‘marginal’ (normal) income tax rate.
Find out more: Budget 2015: the highlights – we round up the key announcements
Selling annuities to a third party
The proposal is not to ‘unwind’ existing contractual agreements with annuity providers, but for the annuity holder to sell on the product to a third party – probably an institutional investor (companies investing for the future), for an agreed lump sum.
The annuity provider would then continue to pay the annuity payments to the third-party investor for the lifetime of the original purchaser.
The government will work with the Financial Conduct Authority (FCA) to consult over appropriate support for consumers. The consultation will consider the extension of the Pension Wise service to support annuity holders thinking about cashing in their annuity.
Find out more: What the pensions changes mean for you – a round-up of the changes
Pensioners must not be ripped off again
Which? executive director Richard Lloyd said: ‘People who feel trapped by a poor value annuity will welcome the chance to take advantage of the new pension freedoms. But pensioners have been failed miserably in the past so the Government must keep a firm grip to ensure people aren’t ripped off again.
‘We want to see strong regulation of sales practices and for anyone considering selling an annuity to have access to guidance through Pension Wise, especially given the high tax bill they could face. ?The Government ?should also? consider whether consumers ?should have to take regulated advice, and whether using? an existing savings and investment provider, like NS&I, could ?deliver security for people uncertain about the wider market.’?
Cut in pensions lifetime allowance
The Chancellor also confirmed that the lifetime allowance of tax-free pension savings is being reduced from £1.25m to £1m in April 2016. This is the amount you can put into a pension that qualifies for tax relief (you don’t pay income tax on contributions to private pensions up to this level).
This means that pension savings of up to £40,000 a year will still qualify for tax relief, subject to an upper limit now on the value of the fund over the saver’s lifetime of £1m. After this a 55% tax charge applies.
The limit has been cut several times since its introduction in 2006, falling from £1.5m in April last year, following a reduction from £1.8m in 2011.
Find out more: Pensions and retirement hub – our all-inclusive guide
- Pensions and retirement – all you need to know about your pension options
- Income options for your pension under the 2015 rules – what to do with your pension
- What is Pension Wise? – how the government’s new guidance session will work