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FAQ: the New Pension Annuity Rules

By: Garry Crystal - Updated: 28 Jun 2015 | comments*Discuss
 
Nnnuity Rules Pensions Annuities

Under new government plans, pensioners no longer need to purchase annuities from their pensions. From April 2011 the new pension annuity rules mean that the present annuity age requirement will now be scrapped.

What Are the Present Pension Annuity Rules?

At present, pensioners must exchange their pension fund for an annuity by the time they reach 75. An annuity is an insurance policy that provides regular income for life in exchange for a pension or a lump sum. Everyone at present with a personal pension must buy an annuity before the age of 75. An annuity can be bought between the ages of 50 and 75. The larger the pension the larger the income for life will be. Many people do buy annuities from their pension insurance company when in fact better deals can be found elsewhere.

What Is the Point of the New Pension Annuity Rules?

In basic terms the new pension annuity rules gives greater choice to pension savers. The existing annuity rules are to be scrapped, and in theory this means retirees can dip into their pension funds as desired. The new pension annuity rules are designed to give retirees more choice on how they convert their pension funds into income. One quarter of the pension fund can be taken as a lump some but the rest of the fund can be used as a taxed income.

What Are the Choices Open to Those Eligible?

Unlike the present rules, those with a pension arrangement no longer have to take any income from their pension before or after the age of 75. The pension commencement lump sum will be available to be taken whether an income is taken, at any age. Pensioners will have the choice of taking an annuity or using an income drawdown. An income drawdown can be either a capped drawdown or a flexible drawdown.

What is a Capped Drawdown?

A capped drawdown is where money will stay invested in shares, property funds, etc, and pension savers take income from the fund. Retirees will be able to decide on their level of income depending on the capped limit. The current income level permitted is 120% but this will be reduced to 100%. This is comparable to the income available from an annuity.

What is Flexible Drawdown?

Individuals who choose flexible drawdown who meet the Minimum Income Requirement of pre-tax £20,000 per year income can choose flexible drawdown. This means they are free to dip into their funds as desired. Flexible drawdown mean the savers can take as much or as little as they wish in income but income tax must be paid on withdrawals. The 25% lump sum will not be subject to tax.

The downside to a drawdown contract, is that as you take income from your policy, the value of it is reducing and will provide you with less of an income in later life.

What Are the Minimum Income Requirements?

The Minimum Income Requirement (MIR) has been set in place to ensure retirees do not take all of their income and then rely on state benefits. The MIR is a £20,000 lifetime income, which would mean a pension fund investment of at least £250,000. The state pension, annuities and personal pensions will count when assessing the £20,000 lifetime income. An individual will be required to show proof that they do have this amount of secured lifetime pension before they will be permitted to use flexible drawdown.

Are The New Pension Rules a Benefit to All?

Not too many retires will be eligible to use flexible drawdown. Most pensioners do not have enough in a pension fund to meet the £20,000 Minimum Income Requirement. Just under half a million people annually buy annuities, and of these, just under 1% would have enough to be eligible for flexible drawdown. But some annuity buyers have private pensions as well as work pensions and in some cases this may be enough to meet the MIR.

What Are the Benefits of Using Drawdown?

Taking a varying income is one of the major benefits of drawdown instead of buying an annuity. Many pensioners are also less than pleased when having to hand over a big lump sum in exchange for a not too substantial income. Annuities also mean savers are locked into the present annuity rates; inflation can decrease the amount of income.

What Are the Drawbacks of Drawdown?

Running a pension drawdown can come with some drawbacks including the expense factor. Investing money is a tricky business and expert help may be needed on investment decisions. This means paying someone to make these investment decisions as well as paying admin charges that could be over £500 per year. There can also be fees charged every time a saver decides to make a withdrawal. This could amount to a hefty chunk of money throughout the running of the drawdown.

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[Add a Comment]
@max. Give the Pensions Advisory Service a call. This is an independent organisation offering advice in relation to the new pension provisions etc. Have all your details to hand.
RetirementExpert - 1-Jul-15 @ 11:26 AM
I took out the 30% tax free lumpsum from each of my 2 small pensions many years ago. One is paying me 42.00 a month and the other is paying me 31.20 once each year. I am not to well and I am alone and would rather spending that little money still in the pot for a better quality of life. So where do I stand? Rung up Prudencial and was told in a rude way, like tough luck, you signed the dotted line, bye bye. Why cant we who are in that situation being unable to get some more out. The whole reform is so unfair. I don`t mind paying tax on it. Any Ideas.?
max - 28-Jun-15 @ 9:34 AM
@vv. Contact the Pensions Advisory Service. They'll be able to look at your details and give you information about the various options.
RetirementExpert - 19-May-15 @ 10:17 AM
I have two existing annuities which I have been drawing an income from for the last two years, in view of the new pension rules I feel that a lump sum from cashing in my two annuities would serve me better than receiving a monthly income. I was diagnosed with cancer in 2008 and this has a bearing on my decision to cash my annuities if this facility is available to me. Would you please give me some indication of wether this is possible. My annuity providers said this is not possible but new rules may come in in 2016 that cover cases like mine and thousands of others.
vv - 14-May-15 @ 4:38 PM
I have a very small annuity with the Prudential.It pays out £58.80 per annum.I have received it since I was 60 yrs and now am 65 yrs old.A cash lump sum would be preferable although I'm sure it would be a very small amount.
Podge - 29-Apr-14 @ 3:52 PM
can I now cash in my annuity that's been paying out a paltry sum for three years and take the lump sum or whats left of it ??
meebrook - 24-Apr-14 @ 9:00 PM
can I now cash in my old annuity with legal and general as its been in force three years, I would sooner have the cash sum now than later
meebrook - 24-Apr-14 @ 8:57 PM
my partner has terminal cancer ,he is 54 years old .will i be able to get access to his pension or do you have to wait till he would be of pension age? very confused.i am the sole beneficary of his will. thnkyou
kk - 20-Jun-11 @ 3:55 PM
The new Pension Annuity Rules, I believe, are meant to give more flexibility to people planning for their retirement. Unfortunately this aim for flexibilty is being thwarted by Pension Providers. The Company I have my Pension Fund invested with has informed me that they will NOT be providing access to the Flexible Drawdown facility even though I satisfy the MIR. I have requested specific reasons for this decision but feel desperately disappointed that I will be unable to have this option available.
Zetland - 29-Mar-11 @ 3:54 PM
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