Well contrary to popular belief annuities may not be dead; in fact according to a recent report from a major UK annuity broker, the annuity market is very much alive.
‘How can that be’ I hear you cry; well when you look at the details it really isn’t that surprising!
Let’s look at the facts:
In March 2014, the government made sweeping changes to the UK annuity market, giving the consumer greater control over their pension pot. Until that point, retirees had no choice but to purchase an annuity. With most people choosing the plan proposed by their existing pension provider, this meant thousands were losing out on market leading annuity deals.
Those wise people who did shop around faced getting at least 30% more income when compared to some of the worst annuity pay outs.
Like then, the new rules allow you to withdrawal up to 25% of your pension pot as a lump sum to spend how you wish, all tax free!
The new rules also state that from April 2015, you will be able to withdraw all of your pension pot to do with as you please; spend on holidays, buy a new car, pay off your debts, have an extension on the house; basically it’s your money to spend how you like.
And that’s where the HEATH WARNING kicks in!
As mentioned, the new rules allow you to take up to 25% as a tax free cash sum, but anything you withdraw above that threshold will have tax deducted at your personal tax rate that is applicable at that time.
Let’s take a closer look.
Take Bob for example. Bob retires with a pension income of £8,000 and a pension pot of £50,000. Currently the first £10,500 you earn is tax free, so as Bob’s pension income is £2,500 below the tax threshold, it is tax free.
If Bob chooses to withdraw the cash from his pension pot, he is allowed to take up to £12,500 (25% allowance) tax free. Anything above that will be subject to tax at 20% up to a total of £31,785 which is when his 40% tax rate kicks in.
Therefore of Bob’s £50,000 pension pot, the following will apply:
• £15,000 will be tax free (Bob’s tax free allowance plus the remaining £2,500 unused tax free threshold from his pension income)
• £31,875 will be taxed at 20% - £6,375 tax paid
• £3,125 will be taxed at 40% - £1,250 tax paid
So the tax man will get his hands on £7,625 leaving Bob with £42,375.
Of course this example takes into account Bob’s pension income and pension pot so you will need to base your own calculation on your own income to establish the rate of tax payable.
With this in mind is it really surprising to learn that according to the leading annuity broker, 76% of people who were purchasing an annuity at the time of the government announcement still went on to proceed?
And don’t forget these new pension changes only affect you if you have a defined pension contribution scheme; for those of you with a “final salary” pension scheme its business as usual. Your pension pot will not be affected, as your pension income when you retire will be based on your final salary; of course you will still have the option to take up to 25% cash as a tax free sum.
It’s good to know that people approaching retirement do have the ability to delay making any decisions which is helpful as many will want to see what new products annuity providers are sure to be offering over coming months. If you can put your plans on hold, this will give you the opportunity to consider your options, either by shopping around on your own or by seeking advice from a Financial Adviser.
Of course if you prefer not to wait, you do still have the option to compare annuities at most comparison websites or directly with the provider but the most important thing is to shop around and don’t just choose the option on offer with your existing provider.
This is your future remember; you don’t want to make a decision you will regret for the rest of your life now do you?