How will the Budget affect pensions?

Chris Torney / 20 March 2015

As part of Saga's Budget round-up, Chris Torney explains how George Osborne's announcements will impact on pensions and annuities.

Given the dramatic reforms of the pension system announced in last year’s Budget, few further changes were expected this week.

But Chancellor George Osborne has announced yet more tweaks. The most eye-catching was the announcement than people who had already bought annuities will, from 2016, be able to cash them in.

Buying an annuity has generally been seen as an irreversible deal. In fact, it is currently possible to sell the income from an annuity, but any money you make is taxed at a punitive 55%.

The change announced in the Budget means that the proceeds from any sale will from 2016 be taxed at the individual’s income tax rate of 0%, 20%, 40% or 45%.

More freedom around annuities

Annuities are designed to pay a guaranteed level of income for the rest of the holder’s life, and many people use their entire pension funds to buy one.

However, annuity rates have in recent years fallen sharply and many customers think they represent poor value for money.

The pension freedoms announced last year, and which come into effect next month, only apply to people who have yet to take their pensions – so many annuity holders felt they were missing out.

Risks of running out of money

This week’s policy change means that annuity holders will be able to opt for a lump sum that they can use for other investments or general spending.

But giving up the annuity’s guaranteed income is a risky course of action, and those who do could end up running out of money and having to live solely on whatever state pension they are entitled to.

As such, the Government says it does not expect most people to cash in their annuities.

Ministers are now planning to work out how an annuity-sale market would operate and what consumer protection systems need to be put in place to make sure people don’t end up making expensive mistakes.

How does the Budget affect savers? Read our guide.

New lifetime allowance limit

Osborne also announced that there would be a new limit imposed on how much money people could save into a pension while still being eligible for tax relief.

At present the lifetime allowance (LTA) stands at £1.25 million but from next April it will fall to £1 million. Any pension contributions over this level will be subject to income tax.

From 2018, the £1 million LTA will however be increased each year in line with inflation.

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