My Take on Changes to Personal Pensions in the 2014 Budget

Written by Karen Bryan

£1 coin stack1After digesting the changes to access arrangements for defined contribution personal pensions in the Budget, I’m sticking to my original plan to purchase an annuity (a guaranteed income for the rest of my life) with annual RPI uprating. I’ll start getting annuity quotes when I’m 55 next month.

I’m not keen on the new option, available from April 2015, to withdraw as much of my personal pension pot as I wish in cash (subject to tax, if more than 25% of the value of the pension pot is taken as cash). Income drawdown (taking an income from your pension pot) is already an option for some retirees; an option which I think is being oversold. Yes, income drawdown does have the advantages that if you die your remaining pension pot can be passed onto your family and it has the potential to yield a higher income than an annuity. However, there are no guarantees of future income from drawdown. If the fund in which your pension pot is invested grows you could do well, if the value falls, you’re stuffed.

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The big dilemma about taking cash from your pension pot is deciding how much to withdraw; too much and your pot could be empty for the final years of your life, too little and you don’t get the benefit of your pension savings. I’d rather go for an annuity, as I don’t want to have to agonise for decades over about the value of my pension pot , the rate of inflation and how much to withdraw each year.

My hope is that the recent changes will put pressure on insurance companies to slash their profit margins on annuities and offer people buying an annuity a higher payout in order to attract more people to buy an annuity. Some commentators are suggesting that annuity rates will fall in response to the new rules, as the main annuity customers will be people who expect to live longer than the average.

I’d be slightly more tempted to go for the new pension withdrawal option if there were a way to move my pension pot out of the clutches of a fee charging personal pension provider. I could get a much higher rate of interest on my pension pot in a standard savings account than in a cash pension fund, plus not have to pay an annual management charge. Both my husband and I have experience of our pension pots losing value when in safer cash deposit pension funds, where the interest rate paid is so low that it’s wiped out by the annual management charge. When you then factor in annual inflation, your pension pot is losing spending power every year.

I wonder if some people would be better to have their pension pot in an ISA, especially a worker (e.g. self employed) who won’t be getting any employer contributions into their pension. A Stocks and Shares ISA should give similar potential growth to a stock market based pension fund. There’s also the option of a Cash ISA to build up pension savings. Although it’s claimed this gives a lower average annual return than a stock market investment, I’m not convinced. I reckon that I could’ve matched the annual growth of my personal pension pot in best buy ISAs. You won’t get the tax relief on payments into ISAs, but any cash withdrawn from an ISA will be tax free. Plus, an ISA is more flexible, e.g. if you want to access it before the minimum age for personal pensions, which is currently 55 (due to increase to 57 in 2028).

I would’ve preferred the UK Chancellor to focus on addressing the cumulative erosion of pension fund value through annual management charges by introducing a pension charges cap and the introduction of a minimum value pension guarantee for people with defined contribution personal pensions.

I still believe that my proposal for a Cash ISA Pension Account is a far better alternative than the latest round of personal pension tinkering.