Budget gives savers freedom over pensions

People will no longer have to buy an annuity with their pension savings when they retire, under changes announced by the Chancellor, George Osborne, in his Budget.

Osborne announced the reforms on 19 March, describing them as the most far-reaching changes to the taxation of pensions since the system was introduced in 1921.

What is changing?

At present, most people with defined contribution pensions, where savings build up in a pot, have to use most of their money to buy an annuity, an insurance product that pays a guaranteed income for life.

From April next year, people aged 55 and over will be able to take their entire pension pot as cash if they wish, or draw it down gradually. A quarter will remain tax-free, and the rest will be taxed as income.

Osborne said people who had worked hard and saved should be trusted to decide what to do with their own money.

Why the change?

Annuity rates have fallen sharply in recent years, because of low interest rates and longer life expectancy. Many people have felt they were getting poor value, and some bought annuities without shopping around.

Everyone retiring with a defined contribution pension will be offered free, impartial guidance on their options.

Shares fall

Shares in insurance companies that sell annuities fell sharply after the announcement, as investors worried about the effect on their business.

Warnings

Some experts have warned that people might spend their savings too quickly and run out of money in old age, or fall victim to scams. Others fear that some retirees could use the money to buy property to let, adding to pressure on the housing market.

The government says it trusts people to make sensible decisions.

Other measures

The Budget also included a new savings account limit of £15,000 a year for ISAs, a new pensioner bond offering higher interest rates, and a rise in the personal tax allowance to £10,500.

The Chancellor also announced a new 12-sided pound coin, to be introduced in 2017, designed to be harder to forge.

The economy

Osborne said the economy was recovering faster than expected, with growth forecast at 2.7 per cent this year. But he warned that the job of cutting the deficit was not yet done.