The Pre-Budget report published last week was confusing for people planning for retirement and looking to buy a pension annuity. It also greatly effected women with patchy National Insurance contribution records, people with smaller pension pots, and the very wealthy.
It will cost 50% more to buy extra national insurance contribution years (to make up for any gaps in contribution records) from next April. Now, people pay £421 to buy an extra year, but that goes to £627 in April. This will have a greater effect on women, particularly those who have had career breaks to bring up children.
Then we have the freezing of the maximum level at which retirees can take their pension as a lump sum, rather than receiving it monthly (as with a pension annuity), a process known as a ‘small commutation’. Currently, someone with a total private pension fund worth up to £16,500 can opt to get all the cash as a lump sum, rather than taking a 25% tax free cash (£4,125) lump sum and getting a monthly annuity. Next year the limit goes up to £17,500, but is due to be frozen for at least five years at £18,000 from 2010. This is an unintended consequence of another measure; the freezing of the lifetime limit to £1.8m for wealthier individuals. The small commutation rate is pegged, by law, at 1 per cent of the lifetime limit. There are thoughts that the government might relent on the small commutation rules, especially if a campaign develops. Otherwise, it is possible that the whole concept of small commutations could wither away.
One bit of good news; it is expected that people earning more than £150,000 will qualify for tax relief at 45% if they invest in pensions, and they may choose to defer contributions until the 2011-12 tax year, when they will benefit from tax relief at the higher rate.