Pension freedoms to be extended to annuities
This article has been reproduced with kind permission of Openwork Limited.
The Chancellor has announced that the government will extend its pension freedoms to around 5 million people who have already bought an annuity.
From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract.
Pensioners will then have the freedom to use that capital as they wish – just as those who reach retirement with a pension pot can do under the pension freedoms announced in the 2014 Budget. This means they can either take it as a lump sum, or place it into drawdown to use the proceeds more gradually.
Pension reform: The next chapter
The new flexibilities build on the radical pension reforms that came into effect on 6 April, which allow people to make their own, informed choice about what they do with their savings in retirement.
Currently people wanting to sell their annuity income to a willing buyer face a 55% tax charge, or up to 70% in some cases. The government will remove this charge, so people are taxed only at their marginal rate.
The government has launched a consultation on the measures that are needed to establish a market to sell and buy annuities. It is expected that for the great majority of customers, selling an annuity will not be the right decision. However a minority of individuals may want to sell an annuity to:
- provide a lump sum for relatives or dependants
- pay off debts
- respond to a change in circumstances (eg. getting divorced or remarried)
- purchase a more flexible pension income product instead
To ensure people are in a position to make an informed decision, the government will be working with the Financial Conduct Authority (FCA) to introduce appropriate guidance and other consumer protection measures. This may include extending Pension Wise, the free service that helps consumers understand how to use their pension pot at the point of retirement.
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