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Pension freedoms – Changes to annuities

George Osborne used his recent Budget to introduce yet another twist to the pension reforms that are due to kick off early next month.

The Chancellor revealed that around 5 million people who have already retired and bought annuities will be allowed to cash them in, if they wish, from April 2016.

This change had been widely expected prior to the Budget. But it fits in with the more imminent reforms which mean that people who retire will have far more flexibility to choose how their pensions are converted into an income in old age.

Changes from April 6th

From April 6, most people who reach pension age will no longer have to buy an annuity. Instead, it will be easier to leave money invested in the stock market while taking a regular income, say, or to take the whole fund as cash.

Annuities have had a bad press over recent years for two main reasons: rates have been historically very low since the financial crisis of 2008, and annuities are generally not reversible: once you’ve bought one, you’ve been stuck with it – until now, at least.

Allowing annuity holders to cash in is the latest example of giving individuals more freedom to use their pensions. This freedom has been welcomed by many, but new risks appear likely to emerge.

The most significant of these is that people will run out of money before they die. An annuity, even if rates are low, pays a guaranteed income for the rest of the holder’s life. This income can be index-linked so it isn’t eroded by inflation, and can even be paid to a surviving spouse following the holder’s death.

Without an annuity there is the chance that people will be left with nothing but the state pension to live on if they fail to make their savings last.

For example, a pension fund could be eroded if it is invested unwisely or unluckily; or if the individual takes too high a regular income from it.

A lot of research into the financial awareness of those coming up to retirement – including the Pre-tirement report by Zopa (PDF) – shows a high proportion of people don’t know when they will be able to retire, or who aren’t sure how they are going to fund their old age.

These new freedoms mean that it is even more important to put some time and effort into working out where you stand when it comes to your retirement finances, and what your options are as far as using any money you have saved is concerned.

Where to get advice

The government is going some way to addressing this knowledge gap with the recent launch of its Pension Wise service. This will offer generic guidance (as opposed to detailed, personalised advice) to people at retirement so that they will have at least some basic information about their choices and the potential risks attached to each possible course of action.

The service allows people to book face-to-face interviews, and can also be reached on 030 0330 1001.