23rd May 2014
The radical changes made to pensions in the Budget have left one-in-five of those approaching retirement more confused than ever about what to do with their savings.
Unexpected reform announced in the Budget now means retirees have given retirees more freedom to access their pension pots with a relaxation of pension drawdown rules that effectively scrapped the need to buy an annuity.
While the changes have been welcomed by those who will no longer be forced to locking into a poorly paying annuity the scale of the reform has been overwhelming for many.
Research by Fidelity shows a fifth of people approaching retirement, or pre-retirees, are now more confused about their retirement options than before the Budget and just one-third of people feel confident that they have a good understanding of the actual rules announced.
The level of understanding varies between age groups, with those closer to retirement feeling they had a better grasp of the changes. A total of 34% of those aged 60 to 62 said they had a good understanding of the rules and this increased to 50% for those aged 63 and over.
However, of the remaining half of the 63-plus group 49% said they were more confused than before, showing the huge gap between understanding.
Those who claim to have a good understanding of the rules are more likely to retire sooner, with 53% of those with a good understanding planning to retire in the next 12 months against just 10% of those with a lack of understanding.
Alan Higham, head of retirement insight at Fidelity, said there had been a ‘pensions revolution’ but questioned whether retirement savers were ‘set to take full advantage of it’.
‘Clearly a strong element of confusion persists, even for those people who claim to have a good understanding of the rules,’ he said.
Higham offered three tips for retirees who were confused about the new rules and what to do with their pension pot.
Under the new rules the government is making it easier for more people to use pensions drawdown. Traditionally pension pots were used to buy annuities that paid out a guaranteed income for life but have been providing increasingly poor value over recent years.
Those with larger pots of money could take advantage of pension drawdown, where the pension pot remains invested and an income draw down from it each year.
There are two types of drawdown; capped and flexible. Capped drawdown, as the name suggests, puts a cap on the amount of income that can be taken each year. The amount that can be taken has been increased from 120% to 150% of an equivalent annuity based on calculations by the Government Actuary’s Department (GAD) and are therefore known as GAD rates.
Flexible drawdown allows the entire pension to be withdrawn – subject to income tax – as long as the retiree can prove they have another guaranteed income in place. The level of this income is known as the ‘minimum income requirement’ (MIR) and has been reduced from £20,000 to £12,000 under the Budget and there are plans to scrap it entirely next year as the single tier state pension comes into force in 2016 and will cover the MIR.
Although no-one will have to buy an annuity anymore, some retirees may still choose to and will have the option of securing their income in retirement if they wish.