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Pension savers to get more freedom over their retirement money

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Pension legislation that forms part of the draft 2011 Finance Bill will give pension savers a greater degree of control over how they use their retirement pots.

Under the draft laws, which were announced in the June Budget, the obligation to buy an annuity from an insurance company by the time someone reaches the age of 75 will be dropped as from April 2011.

People could cash in a greater percentage of their pension pot or opt for continued investment.

There will, however, be a limit on the total amount of money pensioners may still draw down from their pension savings at any given time.

The maximum that anyone can draw in any year will be the equivalent of the single person annuity they could purchase with their pension savings.

Only those able to demonstrate that they have a pension income of at least £20,000 a year, be it a combination of the state pension and a company pension, will be allowed to draw more from their retirement pots.

Those who are in a position to do will be allowed to withdraw any extra pension fund money without restriction but it would still liable to an income tax charge.

In the past, savers have been confined to a maximum lump sum of 25 per cent of their pension fund on retirement, with the remainder used to buy an annuity.

By not buying an annuity, people will have the chance to retain their pension funds for longer and to bequeath extra money to their families.

The new rules mean that a pension pot can be passed to a beneficiary without a tax charge if no money has been withdrawn.

In those cases where money has been withdrawn from a pension fund, what is left can be passed on but a tax charge will be levied. That tax rate will be 55 per cent, up from 35 per cent.

Many pension experts, however, are predicting that most savers will continue to buy annuities, which guarantee an income for life.

A Treasury spokesman said: “The existing rules which create an effective obligation to purchase an annuity by age 75 will end from April next year. This will give individuals more choice over the use of their pension savings to provide a retirement income for themselves.”

The draft Finance Bill also confirms that the amount that people can add to their pension funds and on which they can receive tax relief is to be reduced.

The Treasury announced in October that the annual limit will be cut from £255,000 to £50,000.

Also to be reduced is the lifetime allowance on money that can be saved in a pension fund for which tax relief is allowed. This will come down from £1.8 million to £1.5 million.

The new annual allowance comes into effect as from April 2011; the new lifetime allowance from April 2012.

To protect individuals who exceed the annual allowance due to a one-off  ‘spike’ payment, the government is to allow them to offset this against unused allowance from previous years.

Having announced in the June Budget that it would be reforming the tax system with respect to pensions saving, the government consulted over the summer with various pension professionals, industry bodies and employers.

The original discussion document proposed reducing the annual allowance to between £30,000 and £45,000. However, the government said that targeting the lifetime allowance as well as the annual allowance has meant it has been able to set a £50,000 limit.