What are your pension options from April 2015?

Holly Thomas / 03 September 2014

Pension freedom is not too far away for those planning to retire soon. This is happening in April 2015, when anyone with an eligible pension pot can withdraw as much or little cash as they please.

Eligible plans are those known as defined contribution, that is, those that can be used to buy an annuity, giving them an annual income for life.

During the Budget in March 2014, the Chancellor made the surprise ruling that retiring savers would no longer need to buy an annuity, but they could instead elect to take their entire pension pot as cash when they stop work. The first 25% will be tax-free and the rest taxed as income.

Read more about the new pension freedoms.

Beware of tax

The idea of pension freedom is attractive to many savers. Around one in three of those who are eligible will take advantage of the new pension flexibility, according to estimates from HM Revenue & Customs (HMRC). This means around 130,000 people a year will choose to take cash out of their pension pot when the new rules come into force.

The shake-up is set to generate a Treasury windfall of around £3.8 billion over the coming five years as people move to cash in their pension pots. – and pay tax.

So what about annuities?

The changes were predicted to lead to fewer people using their pot to buy an annuity, which pays out a guaranteed yearly income for someone who has retired. 

But one concern is that those who don’t buy an annuity will simply run out of money. Despite the low rates offered by some annuity companies, there is a peace of mind that the money will be paid as long as you live. Nobody knows how long that could be.

What is an annuity?

Many people will want to take money out of their pensions, when faced with what they might see as a choice between a significant lump sum, or a lower level of income through an annuity.

This doesn’t mean, however, that annuities should be disregarded. For many people they will still be an appropriate choice. People can take pension benefits now, and buy an annuity as they would previously have done.

Those in poor health might certainly feel that handing over their life savings will not be the right move. Indeed, a recent study from Towers Watson found that sales of enhanced annuities, which are aimed at people in poor health or with medical conditions, have plunged by around one-third since the pensions revolution was unveiled in the last Budget.

Need to know more? Saga has an annuities service to help you get more from your retirement income...

The new era

Those at retirement will be able to purchase an annuity using any proportion of their pension pot while a new ‘flexi-access’ drawdown fund will be introduced, with flexibility around how much you can draw and how often.

Other options include going into income drawdown where your money stays invested, which many people choose today if they have substantial enough savings.

The post-Budget retirement world has produced a shift from retirees scrambling to seek out the best rates on offer in the latest annuity tables, to thinking more broadly about retirement provision and their own investment mix.

Those choosing not to buy an annuity are going to need to generate a significant investment return to see them through retirement, which is now stretching beyond 20 years for the majority of people.

Alternatively, they can buy one of the new breed of fixed or short-term annuities, which provide a guaranteed income for a short, fixed term of perhaps five or 10 years, with a guaranteed return of part, but not all, of your capital.

The hope is that rates will have improved by the end of the term, getting you a much better deal when the time comes to annuitise.

Read our guide to drawdown.

Retiring before April?

You will be able to make unlimited withdrawals from April 2015. However, what if you want to start drawing your pension before then? Many people who would have bought an annuity have decided to hold off until the reforms take effect.

Some people will need to look at whether they are able to delay taking pension benefits. You could do this by working for longer or using other investments or savings to provide income in the short-term. But you shouldn't do this without seeking advice first, to see if it’s right to delay things.

If you need income as soon as you retire then moving into income drawdown, is one option. Some pension providers have been lowering charges on drawdown plans to make this easier for investors with smaller savings pots.

Handling retirement

A starting point should always be how to meet your need for income. How much do you need, and when?

Getting high quality, impartial advice on options across the whole of the market is crucial to making the right decision on how to treat your pension fund. Especially because taking a certain level of income could push you into a higher tax bracket.

Everyone who retires with a pension pot - which could be used to buy an annuity - will be offered free guidance on what their options are. Make sure you are getting tailored advice for your individual circumstances, rather than relying on generic guidance.

And people choosing not to buy an annuity will need to decide how they are going to generate a sustainable income from their pension fund for the rest of their lives. 

With increased choices and complexities, many more people should look to take financial advice.

Saga's Financial Planning Service can help you achieve your retirement income objectives...

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.