George Osborne will give elderly greater access to pension savings

http://www.theguardian.com/money/2014/jul/19/george-osborne-pensions-lump-sums-elderly-care

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People will be allowed to take lump sums out of their pension pots well after they have retired to pay for the cost of care in old age and other needs under a further sweeping liberalisation of industry rules to be unveiled by chancellor George Osborne on Monday.

At present pensioners have to decide at the time of retirement whether to take a tax-free lump sum of up to 25% of the value of a pension pot. If savers want to take out more they face punitive levels of tax.

But under changes to tax rules being planned in the Treasury, deals will be available in future allowing cash sums to be taken out later in life to meet sudden needs that may arise, for example high bills for long-term care.

Ministers are also expected to announce a reform of annuities so that they can continue to pay out well after death, to avoid all income suddenly being lost to the family of a deceased policyholder. Currently income from annuities is guaranteed for a maximum of only 10 years from the time they are taken out – if someone dies nine years after retiring, his or her family will receive nothing after a further year.

Under the Treasury plan, the 10-year cap will be dropped and the annuity provider will be able to pay out far longer, although income rates would depend on the length of the guarantee. A further change will introduce deals that vary the levels of income paid out, perhaps providing more in the early years of retirement and less later on, or vice-versa.

The new tax rules and resulting wider options follow a public consultation launched this year, after Osborne had outlined plans for a dramatic shake-up of the industry to allow more flexibility for consumers.

The chancellor said in his March budget that, from April 2015, savers will be able to access and use their pension pots in any way they wish after the age of 55. They will be able to take a quarter of their pot tax-free and will then pay income tax at the highest rate they currently pay (the marginal rate) on any more they wish to take out. Osborne shocked the pensions industry by saying that no one would be obliged to buy an annuity, and that people would, instead, be able to take all the money as cash.

Treasury insiders said the latest plans built on ideas introduced in the budget. A Treasury source said: "The reforms to the tax rules are about encouraging innovation and ensuring consumers have the widest possible choice in how they secure their economic future.

"The government wants [financial]firms to tailor products for individuals, and our reforms will empower people to choose those products that are right for them."

With the expansion of the elderly population, and a growing number needing costly care, ministers are determined to allow pension funds to be used as and when people need them. Some experts fear the plans will backfire and that those who cash in all their savings at once will be left more dependent on the state later in life. But ministers argue that the vast majority will take sensible decisions according to their own needs, and say that the industry has long been in need of a shake-up.

The attraction of cashing in all or some of a pension pot is that individuals can then manage their own money which can be handed down to their family after their death, rather than going to the pension provider. In his March budget, Osborne said: "People who saved their whole lives, saved for a pension, these are responsible people … it is their money. They can do what they want."