Reforms Increase Complexity of Pensions
In the budget of 2014, the Chancellor of the Exchequer George Osborne declared his intention to enhance the flexibility of pension schemes by introducing legislation meaning people were not beholden to purchasing an annuity.
In an extension of that reform, this week has witnessed Mr Osborne announcing the commitment allowing as many as 5 million retired people to be able to sell out of the annuity they had purchased previously. The alteration is set to be implemented in 2016.
The initial change to the legislation pertaining to pension freedoms is to be implemented on April 6th 2014, a matter of weeks. The alterations mean that those who had originally saved money in pension schemes and expected to receive that money via a life-time annuity with an insurance firm can now receive the total value of their pension as cash.
Thus anyone about to retire at the age of 55 years or above can take advantage of this and will not suffer from rigid annuities with poor interest rates.
Despite the temptation to spend all the cash available now on a lavish one-time product or treat, the majority of pensioners are predicted to use this freedom to pay down a mortgage loan or help younger family members.
Because of the extra freedom and responsibility, it is extremely important that pensioners ensure they plan and have a budget for living costs that is adequate for the full course of their retirement years.
However, there are a few qualifications to these pension freedoms that should be duly noted. Firstly, the ability to withdraw cash when you are 55 years or above only pertains to pensions connected with the stock market and not unequivocally to those final salary pension facilities at private companies.
Instead, in order to access pension cash from those private sector schemes, it is necessary for the retiree to move their money from that facility into a ìmoney purchase arrangementî and then navigate the new legislation in order to change that into cash.
This is a complex sequence of transactions to follow and without the correct expertise and advice it could easily cause a number of problems. Further to this, it is necessary for pensioners to be informed and on the lookout for criminals and fraudulent practitioners attempting to convince them to buy into a faulty arrangement or facility.
In fact, for a large number of consumers locked into final salary pension facilities supported by resourceful employers it will make sense to not move around but instead stick with what they have got. However, for those not so confident in their companyís corporate condition it may pay dividends to move onto a money purchase scheme and indulge the ability they will then have to take the cash out.
One thing is for sure. With the increasing complexity surrounding pension legislation and the abundance of choices available to retirees, more thought and effort will be required from those pensioners planning their retirement years.