Many of you will be aware that the way a pension fund works is that you save for retirement over a number of years and then when you reach that golden date you use the fund that you have built up to purchase an income for the rest of your life. This lump sum used to purchase an income for you is known as an annuity. Normally, part of your pension fund can also be taken as a tax free lump sum to do with as you please.
The problem at the moment is the cost of annuities i.e. what interest rate or return you are likley to receive for investing your pension money. Interest rates are generally at an all time low. In simple terms, when interest rates were higher, let's say ten years ago, you would have received a higher income or annuity rate for the rest of your life.
Nowadays, people are living longer and interest rates are lower, so the income that you receive in the form of an annuity is lower for the rest of your life! There are ways that you can defer the purchase of your annuity in the hope that rates may improve in the future and you may then be able to buy a better annuity.
Please contact us if you need help now in this regard.
The problem for pensioners is that you have to buy an annuity by at least age 75 at the latest. This is compulsory, you have no choice. Many believe this does not encourage people to save in pensions for retirement and are looking at alternative options. Many commentators and, indeed, politicians are looking for change.
Parliamentary Bill - Earlier this month, a Private Members Bill was presented at Parliament and driven through by the Conservatives proposing a change to the compulsory age at which we have to buy our pensions be reduced to age 65. However, the positive side to the proposal is that you would only have to encash part of your pension to provide you with a minimum level of income to ensure that you have no reliance on state benefits. The rest of your pension fund could be left invested with no compulsory closing date. The age 75 rule being removed. This has significant advantages for income tax, capital gains and inheritance tax savings as well as the flexibilty to purchase your remaining pension when rates suit you.
The Government, who do not support this Bill say that intoducing a minimum income level annuity purchase at age 65 will not help but drive down further annuity rates. They also say that there are a number of flaws within the Bill. It managed to get through because Conservative Backbenchers flooded in to the House to vote it through in what is normally a quiet Friday afternoon session.
The Bill is likely to fail without Government support and the debate rages on. Consultation papers are expected shortly from the Inland Revenue and the Department of Work and Pensions (formerly the DSS) as the Government do recognise that people want more flexibility for income in retirement.
We will watch and report with interest. If you are at retirement or are nearing retirement and need help on the various choices that you have please do visit our section on At Retirement Contracts or contact us.