High earners given greater retirement options

Under current rules, the 7.8 million people saving with a personal pension have to use their pension pot to buy an annuity, which provides them with an income for life, by 75.

But the less well off will have fewer options from next April, under Government proposals to fine-tune exactly how the new regime will work (see the Annuities Guide).

The Treasury wants to allow those who earn above a yet-to-be-defined minimum income the option of taking an annuity, or drawing unlimited sums from their pension pot, known as an unsecured pension (USP).

You currently can't use a USP beyond 75, but this rule will be scrapped, under the plans.

Those whose income falls below the threshold will be able to purchase an annuity or face a cap on the amount they can draw from a USP.

The Government is worried some will run out of money and be reliant on the state during later life if they are given limitless drawdowns.

Pensions experts generally agree that those with pots below £200,000 should purchase an annuity. Not only may your cash run out by not annuitising, but the value of your pot may fall as it is still subject to investment performance.

Outdated rule

The age-75 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 and in good health have a further 21 years of life expectancy, while women have a further 24 years.

The plans form part of a consultation, which begins today and last until 10 September, with any new rules that result from the review set to be in place by next April.

In the meantime, to ensure those reaching 75 before the legislation comes into effect are not forced to buy an annuity, the minimum age has risen to 77.

The changes will not apply to anyone relying solely on a final salary pension which provides a steady income in retirement.

Tax crackdown

As part of the consultation, the Government is also proposing measures to ensure unused pension pots are not used to bypass inheritance tax on death. With most annuities, they cannot be passed on to next of kin.

The Government is proposing a 55% tax on unused pension pots for those who die after 75.

'More control'

Tom McPhail, head of pensions research at financial adviser Hargreaves Lansdown, says: "This consultation is a revolutionary change, putting investors in charge of their own retirement plans.

"The more you save for retirement, the more control and flexibility you'll have and ultimately, the more you'll be able to pass on to your family on death.

"Combined with the tax breaks available on pensions, these simple messages will be very popular with investors."

The scrapping of the age-75 rule was formally unveiled in last month's Emergency Budget but today's announcement adds more flesh to the bones.

Additional reporting by the Press Association.

Further reading/Key links

Boost income: Benefits Check-Up, Pension Credit, State Pension Boosting More on pensions: Pensions Guide, Free Printed Annuity Guide