Pension pots: What's happened and what does it mean?

On 19th March 2014 in the Budget, George Osborne radically changed the pension landscape!
For everyone with a private pension or a defined contribution company pension scheme the rulebook has been ripped up.

The main change is a shift in power from the insurance companies to you. The changes come into effect from 27th March 2014 and will be in full force in April 2015.

Until now investors wanting to take an income from their pension pot largely had the choice to buy an ‘annuity’ or keep their money invested and draw a regular income – ‘drawdown’.

Because of the regulations and industry practice, drawdown was mainly reserved for investors with more than £100,000.

This means up until now investors with small pension pots had no real choice and had to buy an annuity from an insurance company. In the budget these rules are being relaxed and then removed:

From 27th March 2014 until April 2015 the rules on your pension are relaxed:

1. If you have 3 pension pots of up to £10,000 each and you’re over 60 you can take the full amount as cash – this is Small Pension Fund Commutation.  
2. If the total value of your pension pots (including those already taken) is valued at less than £30,000 and you’re over 60 you can take the whole lot as cash – this is called Trivial Commutation or Triviality. 
3. If you have a guaranteed income of £12,000 per annum and you’re over 55 you can convert any amount of pension investments to cash and draw it – this is Flexible Drawdown.

From April 2015 the proposed rules on how you draw your pension are largely removed. This means in effect everyone over 55 can draw their pension as a lump sum if they choose to.

So now what? If you are at, or approaching the point at which you want to draw pension income you almost certainly have new options. If you thought you had to buy an annuity, you almost certainly don’t have to. You should consider your options and get some professional advice from a financial adviser. 

The gut reaction for those with small pension pots (under £30,000) is probably to see if you can get your hands on the money. If you want that once in a lifetime holiday or new car then maybe this is a good option. If you need this money to fund your retirement then it probably isn’t.

Next post: 5 Good reasons not to convert your pension pot to cash.