Families to benefit from A-Day

Families to benefit from A-Day

Investors will soon be able to leave some of their pension savings to their family, following rule changes that will allow them to avoid buying an annuity.

Annuities have for a long time been the least attractive aspect of saving for a pension. You invest your money, nurture the performance and then on retirement often have no choice but to use most of your fund to buy a paltry annuity income. And I mean paltry: a man retiring at the age of 65 with a £100,000 pension fund buying a single life annuity would get just £6,997 a year, while a woman would get even less - £6,504. When you die, any money left over is absorbed by the annuity provider and lost to the beneficiaries of your estate.

Even if you have a fund of about £100,000, big enough to justify 'draw-down' - leaving your fund invested and drawing an income rather than buying an annuity - the long-term outlook is not good. No matter how careful you are not to deplete your pension fund so there's something left for your family if you die, come your 75th birthday you have to use the fund to buy an annuity.

This might generate more income than you've been receiving through draw-down - a man aged 75 with a £100,000 fund currently gets £9,664 a year, while a woman of the same age would get £8,567 - but again any money left over will be mopped up by the annuity provider.

However, changes to simplify pension rules coming in on 6 April - the so-called A-Day.....continued below

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- mean pensioners will no longer have to buy an annuity at 75. Instead, your money can be moved into an 'alternatively secured pension' (ASP). This means your money will remain invested, and you can draw down an income equivalent to 70 per cent of the return you would receive from an annuity. Alternatively, if you want to maximise the amount you leave to your beneficiaries, you can draw less, or even nothing at all.

Alex Davies, head of life and pensions at independent financial adviser Hargreaves Lansdown, says the government has not revealed full details of the new scheme yet, including tax treatment of any money left to family members, but says: 'We are expecting money left to spouses to be free of inheritance tax as normal, but that left to other family members to be taxed. The rate hasn't been confirmed but we would expect this to come out in the Budget on 22 March.'

Pension firms have been unable to reveal much about their plans for ASPs for the same reason, but both Standard Life and Scottish Widows have confirmed they intend to offer the schemes.

Ian Naismith, head of pensions at Scottish Widows, says ASPs should be available to anyone investing in a personal pension, self-invested personal pension, and from April, occupational money purchase scheme, subject to individual scheme rules. Only those in final salary scheme will not be able to take advantage of the new rules.

However, Davies warns that the scheme is only really suitable for those who have sufficient other income to live on without maximising the income from their pension fund.

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