ANNUITY FREEDOM
Government plans to relax the strict rules about what we do with our retirement
fund will mainly help those with a pension of at least £20,000 a year. People
with less than that in guaranteed retirement income who are under the age of 77
will be more restricted in what they can do.
From April one regime
will apply to everyone from the age of 55 – when access to a pension fund can
begin. Under the new rules no-one will have to buy an annuity – an income for
life at any age. Instead they can put their money into what is called a
‘drawdown’ plan and can take income from it. People with less than £20,000 a
year of guaranteed pension income will be subject to what is called ‘capped
drawdown’ and will only be able to take out an annual amount roughly equal to
the flat single person annuity they could buy with their fund. For the minority
lucky enough to have that much guaranteed retirement income life is much freer.
The £20,000 a year can be made up of the state pension, any pension paid by an
employer, and an annuity. Those with that much will be able to put any further
pension funds into an unlimited drawdown plan. They will be able to take any
amount out of their plan – the whole lot if they want. Any withdrawals though
are taxed as income. So large sums are likely to be at least partly taxed at 40%
and very large sums at 50%.
All drawdown plans
carry annual charges – anything from 0.5% to 2% a year of your money. So for the
vast majority the best choice will still be to buy an annuity, either one that
lasts all your life or one that is time limited which allows a rethink every
five or ten years. If there is money
left in your pension fund when you die you can leave it tax free to charity. If
you leave it to your heirs it will be taxed at a flat rate of 55% but will not
be subject to inheritance tax as well.
PENSIONS MINISTER SUPPORTED UNFREEZING.
Seven years ago when he was an Opposition spokesman on social security, the
Pensions Minister Steve Webb MP asked Parliament to extend the annual inflation
increase (uprating) of the state pension to people living in Australia, Canada,
South Africa, New Zealand and a hundred other countries around the world where
pensions are frozen.
About 550,000 British
people who worked and paid National Insurance contributions in the UK get lower
pensions because they live abroad in countries where the UK pension is not
uprated each year. As a result their pensions are frozen at the rate when it was
first paid to them abroad. Many ex-pats live on state pension paid at the same
rate they got when the reached pension age in the 1980s or 1990s, less than half
the current pension.
They see that as
deeply unfair – not least because the pension is uprated in about fifty
countries including the European Union and the USA. Successive Governments have
baulked at the £540 million cost of paying them their full pensions from now on.
But in 2004 Steve Webb tabled an amendment to a Pensions Bill so that “all state
retirement pensions in payment to pensioners living outside the United Kingdom
shall be subject to annual uprating by the same percentage rate as is applied to
such pensions payable to pensioners living in the United Kingdom”. His amendment
would have only cost around £20 million a year because it would have uprated
pensions in future but would not have raised them to the full rate at once. Even
this modest amendment was not voted on – Steve Webb withdrew it after some
blandishments by the then Labour Minister Chris Pond.
On Labour’s side in
2004 was backbench Conservative MP George Osborne, now Chancellor, who observed.
“If the system worked in the way that most people think, it would not matter
where a person lived, because they would have built up an entitlement. Sadly,
that is not so. Sometimes logic in government runs into the buffers of cost.”
And Pensions Minister Steve Webb’s office told
Saga Magazine “People who are
considering emigrating abroad should always consider the impact the move could
have on their future State Pension entitlement.”
INFLATION U-TURN
Most company pension schemes will not be
changing the way they increase pensions each year after a U-turn by the
Coalition Government. In June the Government announced that public sector
pensions would in future be increased by the Consumer Prices Index rather than
the Retail Prices Index. That will cut the increase in 2011 from 4.6% to just
3.1% costing someone with a £10,000 pension £150. That may not sound much. But
over the next twenty years it could mean a pension which is around 19% less than
it would have been. Those changes to all the major public sector schemes will go
ahead from April.
But the Government
has decided not to extend the change to all company pension schemes. Every
company scheme is governed by its own trust deed – the legal document that sets
out its rules. And about two thirds of these deeds specify that the RPI is used
to increase pensions in payment. The other third simply refer to the
Government’s official measure of inflation. From 2011 that official measure will
be changed from the RPI to the CPI. That will change the rate used by those
schemes. But it will not affect the two out of three schemes that specify the
RPI in the Trust Deed.
The Government
considered extending the change to those schemes too either by forcing a
retrospective change in the Trust Deed or at least giving schemes the power to
make such a change themselves. But in an announcement before Christmas the
Government said it had decided not to make either of these controversial changes
in the law. So in future some company schemes will use the CPI and others the
RPI to raise pensions.
But the effect on
those that change to CPI will be less than it is in the public sector. That is
because the annual increase in company pensions is now capped at 2.5%. That
would limit the effect of moving from RPI to CPI from a reduction of 19% over 20
years to one of 9%.
Further information
Frozen pensions debate in 2004
http://goo.gl/IHmtc
Annuity plans
http://goo.gl/kmjpO