EXPERT COMMENT: Pensions set to become even more perplexing as Osborne ramps up reforms

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When the Chancellor delivered his Budget last year, his announcement to increase pensions flexibility, freeing people from the requirement to buy an annuity, took most of us by surprise.

Now he is going even further, with plans in this week’s Budget to allow up to 5million people who have already retired to sell out of their annuity. That change is planned to take effect from 2016.

The freedoms start in April. They look amazing but those affected need to take care because the retirement choices they make will be among the most important financial decisions of their life. Up until now, most people building up pensions in money purchase schemes had to turn most of the pot at retirement into a life-time annuity purchased from an insurance company.

This week’s Budget is expected to include plans to allow up to 5million people who have already retired to sell out of their annuity, to take effect from 2016.

For many, buying an annuity for life seems inflexible and, with interest rates set to remain low for some time yet, offers poor value.

So the big change from this April is that those set to retire will have the freedom from the age of 55 to take up to the full value of their pension pot as cash.

Although a few may decide to use the money unlocked from their pensions to splash out on a sports car or a dream holiday, I suspect most will use the cash for less exotic purposes – perhaps to pay off a mortgage, or help their kids out with a deposit on a house.

However, they should still ensure that they have enough income to last for as long as they live and decide whether or not that income needs to keep pace with the cost of living.

Whilst the new freedom to take all pension as cash from age 55 applies to money purchase pensions linked to the stock market, it does not apply directly to those in company final salary pension schemes.

In order to unlock pension money from a private sector final salary scheme, you would first need to transfer it into money purchase arrangement and then use the new rules to turn it all into cash.

This added complication means weighing up the new flexibility against the value of the employer-backed pension.

This isn’t always easy and, without advice, could lead to all sorts of bad decisions, especially if telephone fraudsters try to tempt people out of their existing arrangements.

Note the nuances: Whilst the new freedom to take all pension as cash from age 55 applies to money purchase pensions linked to the stock market, it does not apply directly to those in company final salary pension schemes

For most people with final salary pensions backed by strong employers, it is probably sensible to stay put, though that is not always the case.

Those genuinely worried about the employer’s corporate health might prefer to take control of their own pension and jump ship by transferring to a money purchase pension and then have the choice to cash out.

Pension watchdogs are concerned that one unintended consequence may be more cases of fraud or mis-selling down the line.

The world of pensions is about to get a whole lot trickier for us all.