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New cash rule ends annuity trap for pensions

George Osborne's best-kept Budget secret was the most radical reform to pensions in a decade, scrapping a web of restrictions and "trusting pensioners" with their own savings.

From April 2015, people over 55 can take their entire personal pension in cash, though only 25% will be tax-free, and they will not have to buy an annuity.

The rest of the pension can be accessed at the saver's marginal tax rate, for most pensioners 20%, instead of the current penal 55%. The Government will first consult on the changes.

Insurers who have been facing criticism of their excess profits from annuities saw their shares tumble as the Chancellor's bombshell dropped, with the six quoted firms in the market losing a combined £3.1 billion of value after the announcement.

John Blowers, head of Trustnet Direct, said: "This really does stress just how poor value some of these products were for retirees and we are confident that it will encourage even more investors to take even more control of their savings plans."

Stephen Ford, head of Brewin Dolphin's office in Glasgow, said: "This is a total game-changer, and will result in the almost immediate death of the annuity."

In a series of immediate reforms from March 27, anyone with a personal pension pot of up to £30,000 (instead of £18,000), or up to three small "stranded" pots of up to £10,000 (rather than £2,000), will be able to opt for cash.

"The trend towards income drawdown in retirement will be hugely boosted by allowing anyone with a retirement income of £12,000, as opposed to the current £20,000, to choose "flexible drawdown" from their pension without restrictions.

For those in "capped drawdown" the limit on how much they can access will be hiked by 25% from its current government-set limit.

Mr Osborne said: "Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity."

He added: "We are going to introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have. Those who still want the certainty of an annuity, as many will, will be able to shop around for the best deal.

"I am providing £20 million over the next two years to work with consumer groups and industry to develop this new right to advice."

Malcolm Small at the Institute of Directors said: "It has long been time to get real about retirement income, and the Chancellor has done just that. The annuity requirement has long been seen as one of the most unattractive aspects of the private pension saving regime, patronising people about how they could access their own money."

Tom McPhail at Hargreaves Lansdown said the government was "finally treating pensioners like grown-ups".

However Joanne Segars, chief executive of the National ­Association of Pension Funds, warned there was a "distinct lack of detail ... on how the Government will ensure people have access to good impartial advice so they make the right decisions". She added: "We fear these reforms, without careful scrutiny, will leave a large swathe of people vulnerable to poverty in old age."

Roger Mattingly, president of the Society of Pension ­Consultants, said: "The key to the successful roll-out of these plans will be the continued development of a professional, affordable advisory system."

Donald Fleming, pensions partner at KPMG Scotland, said: "Employers [now] have an opportunity and, possibly, an obligation to increase financial education for their employees."

Barry O'Dwyer, workplace director at Standard Life, said: "Pensions are now an even more attractive choice for savers than they were before. We will now work with advisers and customers to help them understand and make the most of these changes."

Dean Mirfin of Key Retirement Solutions, said:"The whole retirement saving landscape has been shaken up and the Chancellor's talk of the most far-reaching reforms since 1921 are absolutely correct. He has ­fundamentally changed the way people save for retirement and how they take their income."

Paul Green at over-50s financial services group Saga said many of the announcements would be "music to the ears of the over 50s".

He said: "Trusting people with their money must be the right approach, but with greater longevity the biggest challenge is to make people's savings last a lifetime.

"Those saving for retirement and the financial services industry need to step up to the challenge."

David Macmillan, at Edinburgh-based pensions group Aegon UK, said the reforms were "a breath of fresh air for a nation of savers who have suffered through five years of record low interest rates".

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