Saving for retirement is now more attractive than ever thanks to welcome changes to pension rules. 

After a lengthy consultation period, which started in July 2010, the Government have finally announced how they will fulfil their election pledge to end the system forcing pension savers to take out an annuity before they reach the age of 75 and converting pension pots into income. 

From April 6^th 2011 there will be new rules in place for the existing pension drawdown arrangement to give investors much more flexibility and control over their pension when they retire. 

So now, if you wish to, you can pass on your unused pension savings to you heirs rather than see them swallowed up into profits for providers of schemes.  If investors wish to live off the income that their pension pot delivers, rather than spending their capital, they will be entitled to do just that.  Independent Financial Advice approaching retirement is now even more essential. 

Basic rules: 

As with anything related to pensions, retirement and tax the rules are somewhat complicated.  Here are the basics of what the Government intends to do, from 6^th April 2011

• End the effective compulsion to buy an annuity by age 75.  Savers will be able to defer indefinitely any decisions on how they spend their pension.  Investors do not have to enter into drawdown or withdraw a lump sum at any particular time or age
• You can carry on saving in a pension and enjoy the tax breaks that apply after reaching the age of  75
• The maximum amount of income that can be drawn will be 100% of a comparable annuity, based on tables produced by the Government Actuary’s Department (GAD)
• Flexible drawdown, those with an income of over £20,000 per annum from a mix of basic state and occupational pension or annuities will have no limit on the income they take from their drawdown.  The income is subject to income tax and will need a fund in excess of £200,000 assuming full state benefit.
• Increase in tax which is paid on lump sum death benefits from drawdown increased from 35% to 55% but will not be subject to inheritance tax for those who die before age 75 without having taken a pension fund will remain tax free.  So in summary, after 75, the unused portion of the pension pot can pass to your heirs, subject to the 55% tax with no further Inheritance Tax payable
• You can still buy an annuity if you so wish
• The changes also apply to those now in drawdown arrangements and come into effect at the next reference period, unless you are already over 75, in which case it will be sooner.

 What this actually means 

An annuity converts a pension fund into a guaranteed income for life.  With the drawdown option, income payments are taken directly from the pension fund which remains invested in the stock market.  With an annuity the income never runs out, with drawdown you may eat into you pension capital and ultimately end up with less income. With an annuity, when you (and your partner) eventually die, the income stops, but with drawdown any remaining lump sum will be paid to your heirs. 

One of the biggest changes to income drawdown is the removal of the income limit on withdrawals each year.  This will apply as long as there is a minimum lifetime pension income of £20,000 per annum is secured. 

Those investors with money purchase pension funds who have yet to take benefits will now be able to continue investing, leave their fund untouched and defer indefinitely a decision to buy an annuity or go into drawdown.  Any pension fund at age 75 can now remain invested until a decision is made as to what to do with the fund. 

The conclusion seems to be the new rules will benefit those who do not wish to buy an annuity by age 75 or who want more flexibility and control over their pension with the exception of the increased tax on death payout.  However, investors should still not discount the purchase of an annuity as this is arguably the less risky option of securing a guaranteed income for retirement.  For those Clients who can generate a £20,000 annual income, they may consider withdrawing the pension fund (subject to income tax) to gift the money into trust to avoid Inheritance Tax

 At Bluebond Investments we offer professional advice on pension investments and the best option to suit your personal circumstances.