Buying a lifetime annuity is still the only way to guarantee an income stream for your remaining years. So for most people it will still play an important role in their retirement planning. What’s likely to change under the new rules is the way people use annuities to manage their retirement income and, in particular, their tax liabilities.
For example, financial advisers expect to see an increase in the number of people buying lifetime annuities later in life, when they can be clearer about their needs, their health and their plans to leave some kind of legacy. By funding the early part of their retirement using other means, they may also be able to minimise the tax payable on their estate.
It’s important to remember, of course, that tax planning is complex and you’ll probably need the help of a financial adviser to get it right. Nevertheless, it is certain that the new rules will make it easier to pass on wealth via annuities than ever before.
Less tax to pay on inherited annuities
If you want a spouse, civil partner or other dependant to receive your annuity income after your death you have three choices. You can take out a joint-life policy so that all or a proportion of the income will continue to be paid until the second death; opt for an annuity with a guaranteed payment period, which will pay out for a set amount of time (beyond 6 April 2015 the current maximum guaranteed period of 10 years will be removed); or take out a value-protected annuity, which allows the remaining pension pot to be paid out as a lump sum to a beneficiary.
With each of these options, the beneficiary would be subject to a tax charge under the current system. For example, beneficiaries of joint life and guaranteed term annuities would pay income tax at their marginal rate, while recipients of a value-protected annuity lump sum would pay tax at 55%.
This will all change on 6 April 2015. From this date, beneficiaries of individuals who die before the age of 75 with a joint life, guaranteed term or value protected annuity will be able to receive any future payments from such policies tax-free. For those who die on or after turning 75, the annuity income or lump sum will be taxable at the heir’s marginal rate of income tax.
More flexibility over who benefits and how
Unlike income withdrawal joint life annuities can only be set up to provide benefits to financial dependants such as your spouse, civil partner or a child under the age of 23.
A fixed-term annuity provides income for a set number of years, rather than for life, and is written under drawdown rules. From April 2015, anyone with a fixed-term annuity will be able to pass on any remaining cash sum to a beneficiary tax-free if they die before the age of 75, or taxed at the beneficiary’s marginal rate if they die on or after age 75.
Another change coming into effect in April 2015 is the abolishment of the ten-year restriction on annuity guarantees. This means an annuity provider can pay income to the individual’s estate for any defined period chosen when the annuity contract was purchased. This will probably lead to the creation of a new breed of flexible annuity that comes with an extended or lifelong payment guarantee, although such products are unlikely to become available until late 2015 at the earliest.
If you are already receiving an income from an annuity you cannot change the income you receive. However, if you have pension funds that you haven’t used or drawn on yet, you can purchase a further annuity on or after 6 April 2015 and benefit from the new flexibility on offer.