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Budget 2015 – More pension freedoms on the horizon

It is not unusual for a chancellor of the exchequer to use the last Budget before an election to put a bit more cash in voters’ pockets.

To head off accusations of cynicism, George Osborne has promised there will be no “giveaways or gimmicks” in this year’s Budget speech.

But the fact is that a section of the population is likely to have substantially more money to play with as a result of changes revealed in both last year’s and this year’s Budgets.

I am referring to the root-and-branch overhaul of the pension system, which will come into effect early next month.

Under changes first announced last March, it will become much easier to take cash out of a pension and use it however you like, rather than having to buy an annuity or keeping the fund invested in stocks and shares.

And in a further twist unveiled at the weekend, the government now plans to allow further freedoms for millions of people who have already bought annuities to cash them in – an option that has up until now simply not been available.

It looks likely that Osborne will tomorrow announce a consultation on this latest proposal.

It would perhaps be unfair to label these reforms as either a giveaway or a gimmick. But they will undoubtedly be welcomed by a large chunk of the population who will get the opportunity to turn their pensions into a significant amount of cash.

But this raises two questions: firstly, should you take this opportunity? And if so, what should you do with all that money?

From 6 April, anyone aged 55 or over will be able to make withdrawals from their pension savings provided they haven’t already been used to buy an annuity or set up a drawdown investment scheme.

A quarter of any withdrawal will be tax-free with the rest taxed as income at 0%, 20%, 40% or 45% depending on other earnings.

The new proposals on cashing in annuities will probably allow customers to sell any income they would receive in future in return for a cash lump sum.

Careful consideration will need to be given to whether you can afford to reject the kind of security offered by an annuity: this is more or less the only way you can ensure your money doesn’t run out before you die.

For those who are planning to cash in their pensions, surveys suggest that investing in buy-to-let property will be one of the most popular investment choices. But a worryingly high proportion appear keen to simply take their pension cash and stick it in the bank.

While these savers probably think a deposit account is a safe bet, research published last week by Zopa shows that holding cash over the long-term can in fact be risky.

Between March 2005 and today, money held in the typical one-year fixed-rate bond would have grown by just 39%. This would have been enough to offset inflation – just – but once income tax on interest was deducted, it would probably mean a loss in value in real terms.

The pension reforms will give pensioners much more control and responsibility over how they use their funds to provide a comfortable retirement. But the flipside is that there will also be much greater scope for people to make poor financial decisions.