Savers retiring from April 2015 will be offered free and independent guidance when they decide how to take income from their pension pot, the Treasury has announced.
The government has also decided that pensioners in flexible drawdown arrangements, who are currently banned from making pension contributions, will be allowed to contribute up to £10,000 a year into pensions.
The tax on lump sum death benefits will also be reduced from 55 per cent, allowing pensioners to pass more of their pension money down to their families. However, the details will not be released until the Autumn Statement, making retirement planning difficult for workers hoping to retire in the near future.
These changes part of a set of important rule changes the government is introducing as part of its radical new pension freedom reforms, first announced in the Budget. This week the government has released clearer plans for how certain aspects of the new system will work.
Retirees will be entitled to one-off 25-minute help sessions: These will be delivered either online or over the telephone. Two government-run organisations, the Money Advice Service (MAS) and The Pensions Advisory Service (TPAS), will be among the bodies providing the service.
Regulated pension firms will foot the bill for the guidance through a levy, but the chancellor of the exchequer, George Osborne, has warned them to stay away from advising people on what to do with their retirement pots.
Previously, the government had considered allowing pension providers to give savers face-to face retirement advice, but it U-turned on this idea after the Treasury research found that guidance given by firms with a vested interest in selling financial products or services would be less likely to be trusted by the public than an independent party.
Up to 500,000 people will need guidance next year, the National Association of Pension Funds (NAPF) estimates.
David Smith, a financial planning expert at Bestinvest, said: "This is a clearly a step in the right direction, but the public are likely to be sceptical. People need to develop a retirement plan many years ahead of retirement in order to secure a decent outcome. An adequate financial position in retirement is all about understanding the required level of savings that need to be made, using tax-efficient plans such as individual savings accounts (Isas) and pensions where possible and, of course, selecting high-quality underlying investments is of paramount importance. None of this will be provided under the pensions guidance scheme announced today."
Karen Barrett, chief executive of financial adviser directory unbiased.co.uk, said: "Guidance is a welcome starting point and a step in the right direction, but it doesn't take consumers' individual circumstances into account. This can only be achieved through advice. The need for proper, face-to-face advice at retirement is very apparent. Our latest research found only 38 per cent of people said they were confident about their retirement plans and one in four (25 per cent) said they were anxious."
Defined benefit (DB) pension transfers won't be banned: Mr Osborne previously threatened to ban transfers out of private sector DB schemes (which provide a guaranteed retirement income, commonly related to final salary) into defined contribution (DC) schemes. However, the chancellor has confirmed that this plan will not go ahead. Instead, workers with DB pensions will continue to be allowed to switch them into DC schemes in order to take advantage of the new and more flexible pension rules. However, savers with more than £30,000 in DB benefits will be made to pay for independent financial advice before being allowed to transfer their money.
Graham Vidler, director of external affairs at the NAPF, says: "DB pensions are often highly valuable and anyone considering a transfer should think very carefully before making an irreversible decision. The requirement for savers to take independent financial advice before making a transfer from a DB scheme is an important safeguard."
• IC readers who are considering transferring out of a DB pension should read our articles:
Best time ever to ditch your final salary scheme
The death of final salary schemes?
Should you leave a final salary scheme?
Extra annual allowance will be given to pensioners in flexible drawdown: There was some good news for pensioners already in flexible drawdown arrangements (in which people with £20,000 or more in guaranteed pension income can draw unlimited lump sums from additional pension money). The amount they are allowed to pay into their pensions every year, and get tax relief on, will be raised from £0 to £10,000.
However, anyone who has taken more income than the annual maximum limit for capped drawdown (for which they will have paid a tax penalty) will have annual pension contributions restricted to £10,000. Under current rules, they are able to contribute £40,000 a year into a pension.
The legislation is designed to prevent people recycling pension money to avoid tax - full details of how it will work will be published in the autumn.
New, more flexible, annuities are on the way: The government is changing the tax rules to allow pension providers to invent annuities that offer savers more flexibility, whilst still providing them with a guaranteed income for the rest of their life. Currently, when savers buy an annuity, they swap their pension pot for a fixed annual income, or one that rises in line with inflation. But the new rules mean pensioners could be allowed to withdraw lump sums from their annuities, take a larger income in the early or later years of their retirement or even take a decreasing income. However, critics are concerned that such products could could end up giving pensioners poor value for money becuase complex structures are likely to add extra layers of complexity and costs.
New contribution restrictions for pensioners will be introduced: Anyone over 55 who has already spent some or all of their pension pot (not including the 25 per cent tax free lump sum), will now be unable to receive tax relief on pension contributions above £10,000 a year. However, this rule will not apply to DB benefits, meaning savers will still be allowed to contribute up to £40,000 a year into these schemes. This catch could be be particularly annoying for savers who have accessed their pension but are still working and trying to further build up their pension.
The defined contribution pension access age will rise: The age at which savers can start spending their pension will rise from 55 to 57 in 2028. This rule change will affect pension savers who turn 43 in this tax year, and everyone younger. It has been introduced to bring DC rules in line with the state pension age, which will be 67 when this rule kicks in. From 2028, the minimum age you can access your DC pension will be ten years below state pension age.
Tax on lump sum death benefits will reduce: The Treasury has confirmed that the tax on lump sum death benefits paid from crystallised funds (a pension pot from which income is already being taken) will fall from 55 per cent. However, savers will have to wait for the new lower rate to be announced in the Autumn Statement. This delay is likely to cause frustration for retirees trying to plan a tax-efficient retirement.
