Fundamentally, I think that this is a great idea as it gives me more options of what to do with my money when I retire, but inevitably, I still have lots of questions.
- How will this impact, if at all, on the current possibility of taking up to 25% of your pension pot as a tax free lump sum on retirement?
- Presumably, taking out the remainder of your pension pot as cash will still attract a tax charge, but what if you want to invest it in some other investment product and not an annuity. Will it be possible to invest gross and pay tax on the income from that investment (as currently happens with an annuity) or will it be necessary to pay tax up front, and then pay tax again on investment income?
- The change in the tax charge on the amount over the lifetime allowance is also welcome news, as a 55% penalty on the excess was pretty shocking. However, whilst not directly related to the annuity rule changes, I'd love to know what is likely to happen to the total lifetime allowance amount. It has been reduced from £1.5m to £1.25m, but can I expect that to increase with some form of indexation in the coming years. Whilst undoubtedly £1.25m is a large pension pot to contemplate, £1.25m in 20 years time is a very different amount of money to £1.25m today. Isn't it reasonable to ask for some form of "forward guidance" in this area?
- If at risk of exceeding the lifetime allowance, given that the excess will be charged at a marginal tax rate, is there a benefit to reducing contributions now, suffering a higher tax bill now, and putting money away in a market-tracking ISA (especially given the announcement on increasing annual ISA allowances)? At least the returns on an ISA accrue free of tax, whereas any returns on a pension pot that continue to push it further past the lifetime allowance will only increase the tax charge.
- What should we read into the fact that the Chancellor thinks that the changes will increase tax receipts in the coming years? (Presumably this is good evidence that you don't get to walk away with your pension pot in cash tax free.) This seems to suggest that he expects people upon their retirement to show a lack of prudence and burn through their pension pots faster than would have been the case had they taken out an annuity.
- Is this a good thing? Doesn't it mean that in not too many years there will be a number of pensioners who no longer have much, if any, of a private pension income? If so, what will be the impact on the state and will it put a further strain on public finances?
- And finally, what will happen to the annuity market now that people will not be forced towards it? Will the market work even less effectively than it does at the moment, causing even lower annuity incomes for people who choose to go down that path?
With more choice comes more complication, and more questions!