Pensioner bonds and the Government’s pension provision shake-up is good news for savers, says Richard Wright
If you’re young, pensions are a tax-efficient way to save. As you get older you begin to contemplate living off a pension and wondering what sort of lifestyle it will deliver. That debate is complicated by the fact that the Government, in the latest budget, changed the pensions landscape. People will now have more freedom to decide how to spend their money. They can also escape compulsory annuities, which took a pension fund and delivered a pathetic lifetime income guarantee that left many people wondering what had been the point of paying into a pension through their working lives.
Pensions are very different for anyone in the public sector. They are now some of the very few on final salary pension schemes – highly generous and paid for by the taxpayer. However, as employers, even in small businesses, people will have to enrol staff in a basic pension scheme. When that becomes compulsory depends on the number of employees, but all employers must automatically enrol staff over the age of 22 and earning more than £10,000 a year in a scheme. Staff may opt out, but it’s a legal requirement for an employer to make a scheme available.
The big change in pensions, which will apply from the start of the new tax year, is freedom to use the fund as you wish. In the past it become compulsory at the age of 75 to convert a pension to an annuity, although from 55 onwards you could draw down funds from a pension. As interest rates fell, annuities offered a poor return, and the only winners seemed to be financial advisers getting commission from selling them and the insurance companies managing them.
That’s all been swept away in the most radical changes for years. The first concrete thing next year will be the new so-called pensioner bonds. These will be available to anyone over 65 and will pay a market beating return of 2.8% for one year and up to 4%, as things stand now, for four years. There will be a limit of £10,000 on an individual holding. These will be operated by National Savings and Investments (NS&I) and are expected to be massively over-subscribed from their launch date in January. As they will trigger a switch of funds from banks into these bonds, banks are expected to improve the rates for their bonds in response.
Beyond that, come April, everyone eligible to draw from their pension will be entitled to a free interview with a financial adviser. These will be partly funded by the Government, but mainly by the financial services industry. They will be advising people what to do with their pension pot and other savings/income, because there will no longer be any restrictions.
As under existing rules, 25% of a pension pot can be taken tax-free. Beyond that any draw-down from a pension pot will be taxed as marginal income – an additional payment to any other earnings. Within those rules there will no longer be any restrictions on what you do with a pension pot. Draw it down as you want from the fund; take the whole lot and buy a super car or a home on a Portuguese golf course – or be prudent and use it for a modern version of the old compulsory annuities – the choice is yours. And despite speculation that people would go mad and spend the lot, research suggests people will be prudent by planning to use their pension pot to deliver an income.
As to income in retirement, recent research suggests anyone with an income above £15,000 a year will feel reasonably content that they can fund the lifestyle they want to have.