The pension reforms taking the UK by storm were announced by George Osborne at the end of 2014 and were hailed as the biggest change in UK pension history. As of April 6th 2015, those aged 55 and over now have full control of their retirement finances. The new changes mean that the old requirement of purchasing an annuity is no longer enforced, opening the door to other more flexible options, including accessing your pension as a drawdown or even as a lump sum. Of course annuities will still be available to those who choose to purchase one, but they are no longer a legal requirement when gaining access to your retirement fund as once it was. Far from the ‘one-size-fits-all’ mentality that once dominated the pension landscape, these new reforms seek to give those nearing retirement age complete flexibility and freedom to choose the financial strategy that works for them.
Traditional pension pots
In the UK, most savers have three defined pension pots: a State Pension, a Self-Invested Personal Pension (SIPP), and an employer Pension.
Overview of the changes
The Autumn Statement released in December 2014 heralded huge and revolutionary changes for the UK pension landscape. For years, UK savers have been legally obligated to purchase an annuity with their retirement funds, as the Government has long seen this as a ‘safe’ option to ensure guaranteed income in retirement. However, December 2014 saw Chancellor of the Exchequer George Osborne spearheading a new era of pension savings—for the first time, annuities are now a choice rather than an obligation.
Choice was definitely high on Osborne’s agenda—the point was highly reiterated that those nearing retirement age should have the choice as to how they invest their retirement funds. Therefore, as well as changing the legislative obligation to purchase an annuity, Osborne also announced that there will be new options available for those nearing retirement age as an alternative to annuities: there is now the option of a pension drawdown, as well as the option to withdraw the whole pension pot as a lump sum.
Drawdowns offer pensioners the ability to withdraw some or all of their personal pension funds, allowing for full financial flexibility that annuities specifically do not offer. What’s more, Osborne announced that this drawdown option will also be somewhat tax-effective, with the first 25% of the pension pot available to withdraw tax-free.
Annuities are still an option for those seeking a safer option, but for years people have been disillusioned by the low annuity rates, instead wishing for the chance to make the most out of their nest egg by taking on more risk but in the hope of generating more flexibility and better returns. These new pension changes were made to encourage those nearing retirement age to make savvy financial choices that suit them, rather than forced to adapt a generic, and overly ‘safe’, approach to pension funds.
New pension options
There are now three main choices available to those nearing retirement age (defined as aged 55 and over):