Budget commentary 2015

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The Chancellor confirmed that the government will further extend pension freedoms to around 5 million people who have already bought an annuity. From April 2016, the government is proposing to amend tax rules to allow pensioners to sell their annuity contract to a third party, subject to agreement from their annuity provider.

Pensioners will then have the freedom to use that capital as they want – just as those who reach retirement with a pension pot can do under the pension freedoms announced in the Budget 2014. However, money raised in this way will also be subject to income tax and those selling their annuity contracts will need to understand this, as well as being aware that the value they get from selling their annuity may not be a great deal given what they paid for it in the first place.

The Chancellor announced that it will work with the Financial Conduct Authority to consult on how best to support people’s choices through consumer protection and protect the most vulnerable’.

This seems to be a final piece of the jigsaw for pension freedom and flexibility following the radical reforms announced in last year’s Budget, which allow the majority of people to make their own choice about what they do with their savings in retirement.

Jonathan Watts-Lay, Director, WEALTH at work comments, “Extending the new pensions flexibility to the five million people who have already bought annuities, by allowing them to sell the income they receive for a cash sum is not without complications and will further drive the need for financial education and advice. It would concern me if this measure makes people think that annuities are suddenly a throw-away product they can buy and sell at will, as there are likely to be significant transactional costs and taxes to pay. In the Chancellors own words ‘guidance and advice’ will be needed.”

The government will now launch a consultation on the measures that are needed to establish a market to sell and buy annuities.

It has also been announced that lifetime allowance of tax free pension savings will be cut from £1.25m to £1m in 2016. However, it will be index linked from 2018 to protect the value of the allowance against the effects of inflation.

Currently savings of up to £40,000 a year qualify for tax relief at the marginal rate of the saver, subject to an upper limit on the value of the fund to remain tax sheltered over the savers’ lifetime of £1.25m. After this a 55% tax charge applies.

Watts-Lay continues, “Reducing the lifetime allowance from £1.25m to £1m will have impact on a number of employees approaching retirement and particularly those in defined benefit schemes who may suddenly exceed the limit, perhaps due to a promotion and subsequent pay rise. A number of employees who are close to the limit may look at other savings vehicles such as ISAs as an alternative, especially given the announcement about the new fully flexible ISA. This new pension world is about looking at all savings and assets to provide retirement income and to ensure they are accessed in the most tax efficient way. It is important to utilise available tax allowances and reliefs in a structured manor and advice is crucial in this respect”.

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