Kevin O'Shea looks at the latest plans for pensions following the shake-up announced in the Budget.

Perhaps as a prelude to the skills on show at this summer's World Cup, we've recently been given a glimpse of our domestic talents with George Osborne's punt at the pensions political football.

The changes announced by the Chancellor in his spring Budget aim to offer pension savers more freedom, choice and flexibility than ever before in how they access their pension savings. Gone is the need to annuitise pension pots and a clear intention has been set out for anyone of pension age to be able to draw as much (or as little) from their pension pot as they choose at any time. A quarter of the pot would still be tax-free and the balance would be taxed as income in the year it is taken.

Immediate changes to income limits

The proposals will be consulted on this year, but some immediate changes have been introduced.

Capped drawdown income limits have been increased by 25% (to 150% of an equivalent annuity) and the secured income hurdle has been reduced from £20,000 to £12,000 to enter flexible drawdown. The intention is to remove income limits completely in 2015.

The future of annuities

The removal of annuity purchase requirements is a welcome step, but annuities still have a place for many retirees. Annuities provide insurance against longevity risk and ensure that retirements do not extend beyond financial means. As we live longer and fuller retirements, it's important to ensure that lifestyles can be maintained and that, on death, the surviving spouse is catered for.

This new flexibility will raise some important issues for those reaching retirement, such as the level of a policyholder's disposable income in retirement and what happens when he or she pre-deceases their spouse. Annuities provide guarantees against these uncertainties, but this is reflected in their cost.

Those opting for drawdown will often benefit from professional advice on tax-efficient withdrawals of income, income sustainability, investment risk and cashflow planning to guide them through the options.

Pension death benefits

Annuity death benefits will be determined by the terms at outset and can be written on a joint life basis in differing proportions (e.g. 33%, 50%, 100% reversion to spouse on death).

Under drawdown, a spouse may inherit the pension fund in the current 'wrapper' and continue to drawdown or may purchase an annuity without triggering a tax charge. Income taken will of course remain subject to their marginal rate of income tax. Alternatively, the spouse can opt to receive the value of the pension, but will be subject to a 55% tax charge (at current rates) – although this may be reduced after the current consultation.

This punt at pensions 'liberation' has launched the political football skywards and only time will tell whether it was a David Beckham-style stunning strike or a socio-economic own goal. Either way, it's clear that many will require professional advice to protect their retirement goals.

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