Last week, the Chancellor of the Exchequer George Osborne announced further changes to the way the pension system works in the UK, following some major alterations that happened back in March. These previous changes had a significant and widespread impact, so these subsequent refinements were met with considerable interest.
The Changes
Firstly, married pensioners will now receive additional tax breaks when either partner dies. Previously this had been limited to those who have not already used their pension pot to purchase an annuity (financial product in the UK that pays out an income for retirees), but this has now been clarified. In short, any surviving spouse of a partner that dies before the age of 75 will pay no income tax. This should impact around two million in the UK.
Furthermore, those who purchase annuities after April of 2015 will be able to designate any beneficiary to inherit their pension pot upon death. This includes, and is most likely to be brothers and sisters,children, and grandchildren. There is some confusion however, as to whether this affects those with so-called ‘joint life’ annuities.
Finally, it has been confirmed that the state pension is to rise, as government policy has already indicated. It will rise by what is known as the ‘triple lock’ – whichever is higher of the average growth of earnings, inflation, or the basic figure of 2.5%. This will also occur in April of next year.
Implications
The changes have the benefit of making annuities more of an attractive prospect to drawdowns, which previously had better tax implications upon death. This has been a concern to the OECD. Choosing a drawdown can be a riskier choice to make, and there have been claims that they may have resulted in many pensioners with lower income as a result of poor investment performance. However, some financial advisers such as James Hay point to currently poor annuity rates as a reason that drawdown is popular.
Speculations had been considerable in the months and weeks leading up to the autumn statement, with some expecting the Chancellor to use pensions as a mechanism to make further cuts. This was predicted to have come from higher earners, or by limiting the total or yearly amount that could be saved for a pension plan, but clearly none of this has happened, much to the appreciation of many.
