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First pension changes come into effect

The first stage of the pension reforms announced in the 2014 Budget has come into effect.

From 27 March 2014, pension holders will find it easier to access their savings and they will enjoy more flexibility in managing their pension pots.

Cashing in

From 27 March 2014, the limit for cashing in pensions will be raised to £30,000. Under the old rules, the combined value of all pension pots could be no more than £18,000.

The limit on the size of small private pensions that can be cashed in has been raised to £10,000. Previously, small private pensions could be cashed in, provided they were no more than £2,000 each.

In addition, savers may be able to cash in up to three small pots instead of two.

Income drawdown

Income drawdown allows pension holders to take income directly from their pension pot instead of buying an annuity. Savings stay invested and the holder continues to benefits from any growth.

There have been changes to both types of drawdown:

Capped drawdown places a limit on how much the pension holder can withdraw each year. Under the old rules, a maximum of 120 per cent of a Government-set amount could be withdrawn each year. The limit has been raised to 150 per cent, allowing pension holders to take out more money.

Flexible drawdown allows the pension holder to withdraw unlimited amounts. Under the old rules, the holder needed to have a guaranteed pre-tax income of £20,000 a year in order to use flexible drawdown. This has been reduced to £12,000 under the new rules.

Industry reaction

Some in the insurance industry have voiced concern about how these changes are being implemented. Huw Evans, director of policy at the Association of British Insurers, said:

"Pension and annuity providers were given no advance warning ahead of the Budget changes that came into effect.

"The Government's announcement introduced a cliff-edge for customers and it is wholly unacceptable that a week after the Budget HMRC has still not clarified the rules around whether tax free lump sums can be reversed for those customers who have just annuitised and wish to change their mind.

"The current HMRC rules state that this is an irreversible benefit - yet providers, customers and financial advisers need clarity urgently if they are to navigate the current situation."

Talk to us about your options for turning your pension into an income at retirement.