Would you prefer an income or a cash lump sum in retirement?

Regular readers of our articles will be aware of the increased flexibility being introduced to those planning to take retirement benefits from April 2015 onwards.

The new rules offering freedom and choice in pensions for those aged 55 and over come into effect from April 2015 (with some interim arrangements for some more specialist pension contracts, such as executive pension plans), but over recent weeks the Pensions Minister, Steve Webb, has suggested expanding the rules even further, to include those who have already purchased an annuity.

So what is being proposed?

There are almost five million people in the UK who are in receipt of an income from an annuity, but Mr Webb’s suggests a further change to pensions legislation to extend greater flexibility and options to these individuals.

Current rules mean that once an annuity has been purchased there is virtually nothing that you can do. An annuity won’t generally allow you to take a further cash lump sum or alter the level of income you receive (the new rules being introduced in April will permit flexibility of income), but these new proposals could mean creation of a completely new environment; one that effectively creates a second-hand market for annuities, with two potential options.

The first of these would completely change the current rules and entail the product provider and annuity holder agreeing a price for cancellation of the existing arrangement, in exchange for a lump sum payment. Of course, this would be based upon complex actuarial calculations and it is unlikely that any provider would enter this market unless it was profitable.

The other option would involve continuation of the existing income payments, but transferring them to a third party, again in exchange for an agreed lump sum. These third parties would also need to be able to generate a profit from such activities.

No market currently exists that could facilitate these proposals, which are still at the ideas stage and as such would require a subsequent change to existing legislation, but this does further complicate matters as far as retirement options are concerned.

Some commentators have intimated that the new pensions freedoms announced in last year’s Budget could indicate the death-knell for annuities, but this may not be the case, especially for those who prefer the certainty of a guaranteed level of income for the remainder of their lifetime. For many, a secure level income will still have a greater appeal than the flexibility that the new reforms can offer, but the Minister’s latest comments will undoubtedly spark further interest.

What is increasingly clear is that revised pension flexibility and the choices available are becoming increasingly complex, due to the long term impacts that they can have, so for many people the options can seem bewildering. Given the number of possibilities for people considering their retirement options, seeking professional financial advice to identify the right route could be crucial in order to avoid potentially costly mistakes.

Contact one of our Financial Planning Consultants at any of our 15 office locations to discuss your retirement needs.