Budget 2015 – pensions: Freedoms come with ‘cap on aspiration’

Osborne overturned rules trapping pensioners in unattractive annuities

The law on annuities will be changed from April 2016 (Getty Images)

The Chancellor hoped to secure the influential grey vote with a promise to overturn rules which trap pensioners with existing annuities in unattractive deals.

The law will be changed from April 2016, to allow the five million pensioners who have already bought an annuity to sell it, or move their money into another asset, offering a better return on their lifetime savings.

Under current rules, people who want to sell their annuity face a 55 per cent tax charge, which can rise as high as 70 per cent in some cases.

The Government will axe this charge, so that those who choose to opt out are taxed only at a marginal rate, based on income, and will be free to invest their pension pot how they choose.

Such pension freedoms were unveiled for over-55s approaching retirement last year. Yesterday’s announcement will help existing pensioners already lumbered with a poor value annuity.

The beneficiaries of pensioners with a joint lifetime or guaranteed term annuity who die under the age of 75 will also be able to receive future payments tax free.

But wealthier pensioners may be angered by the decision to cut the lifetime tax-free pensions allowance from £1.25m to £1m from next year.

The move was branded a “dangerous cap on aspiration” by deVere Group chief executive Nigel Green.

“This pre-election gimmick is a disincentive to save as much as possible for retirement and, therefore, it could be harmful to Britain’s long-term economic success,” he said.

Case study: The retired lecturer

Stewart Deas, 65, lives in Jesmond, Newcastle. Before retirement five years ago, he was a lecturer at a higher education college.

This is smoke and mirrors from the Tories. It’s an election Budget – an attempt to win votes. Most people by retirement age are quite canny with their money so I can’t see changes to the law on annuities being a major risk. I receive a final-salary teaching pension, so have been left reasonably comfortable.

As for the tax-free personal allowance, I’m surprised it’s only being increased to £10,800 next year. For me, raising the allowance is a significant measure, so I’d have looked for a higher increase.

Pledges about the “Northern Powerhouse” always tend to be concerned with Manchester, so in the North-east we’re somewhat neglected. I’d like to see more emphasis here, it’s frustrating.

There were some good points. My children are in their late-20s so I’m keen on the help-to-buy ISA.

Which way will you vote?

I plan to vote on policies, not on what Osborne says in one hour in March. I’m looking at a party looking to do more for the poor and vulnerable, so I’ll be voting Labour.