Moves give pensioners 'flexibility'
The Government has confirmed plans to scrap rules forcing people to use pension savings to buy an annuity by age 75.
But pensioners will need to have a pension pot worth at least £20,000 a year to take advantage of the greater flexibility, according to details within draft legislation of the 2011 Finance Bill.
The minimum income requirement has been introduced as a safety net to prevent people from using up all of their retirement savings too soon and becoming a burden on the State.
Experts welcomed the pension changes for giving people greater flexibility over the way they use their pension, which is hoped will encourage more people to save for their retirement.
Helen White, acting director of life and savings at the Association of British Insurers (ABI), said: "The new flexibility will allow pensioners to take their retirement income in the most appropriate way for their own circumstances." She added the minimum income requirement would "protect people from depleting their pension pots and falling into poverty unnecessarily".
Under current rules, the 7.8 million people who are currently saving through a defined contribution pension and those with a personal pension have to use their pension pot to buy an annuity, which provides them with an income for the rest of their life, by the time they are 75. But the rule was introduced in 1976, when the average man who had reached the age of 65 was expected to live for only another 13 years.
Today, men aged 65 who are in good health have a further 21 years of life expectancy, while women have a further 24 years.
Government plans to enable people to work on past the default retirement age also mean that having to buy an annuity by the age of 75 is likely to be unsuitable for growing numbers of people.
The Treasury said that up to 200,000 people use income drawdown arrangements for retirement, which could be "considerably larger" by not being forced to buy an annuity by age 75. But it is putting in place a number of measures to make sure the move does not lead to tax avoidance, or pensions becoming a tax-privileged way of passing on wealth.
It is also introducing safeguards to ensure people do not run out of money and become dependent on the state, such as the minimum income requirement, while also slashing the tax rate on funds remaining at death from 80% to 55%.