The government’s decision to scrap compulsory annuitisation – the requirement to buy pension annuities before we turn 75 – will undoubtedly provide some of us with additional freedom in retirement.
While the purchase of an annuity may well remain the best option for the majority of people, those who do avail of the ‘increased flexibility’ so vaunted by government in the new proposals may well be in for a shock.
The flexibility referred to here is the ability to pass on the remainder of your pension savings to your children, when you die.
By not purchasing a pension annuity, we remain the owners of our pension savings, but may well find we face a hugely increased flat rate tax of 55% (previously 35%) on funds left to our children and heirs. This has led some observers to slate the proposals as a stealth tax, and an additional way for government to reclaim the cash so painstakingly built up (and possibly taxed once already!) by pension savers during our working lives.
Another controversial issue is the possible announcement of new rules that allow earlier access to pension pots. The ‘locked box’ pensions model, where your money is out of reach until you retire, has been seen as discouraging pension saving for many who feared they may have a sudden need for cash, at some point before retirement.
In recent years, savers who opted not to contribute to personal pensions or company pension schemes have instead used their ISA allowances to save for their retirement, while keeping their cash close and accessible.
The government sees an early access model as a way of diluting these fears, by reassuring pension savers that the ‘locked box’ is not locked for for quite so long in the future.
Human nature being what it is, however – the spirit is willing, but the flesh needs a suntan - it is possible that the real winners could be the hotel owners of Majorca and Lanzarote, or the car dealers of Birmingham, Bristol and Belfast, as many delve into their pension savings to fund their annual holiday (or a larger home, or a new car), leaving less on which to retire.
