The future for pensions
First published 16 April 2014 • Updated 13 March 2018
The 2014 Budget will be remembered for the revolutionary changes to pensions legislation that took even the most seasoned ‘experts’ by surprise.
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The pensions revolution was largely unexpected. But then again, was it ‘revolution’ or ‘evolution’?
Major press campaigns and lobbying by consumer groups have long called for changes to the current annuity rules which have for many years of late represented ‘poor value’ and forced people into making a single decision on funds that they have accumulated over much of their lifetime.
We are also in a world where there is more regulation of ‘self’ with self-assessment of income tax and now from April 2015 ‘self-control’ over access to your accumulated, money purchase pension fund, while interim rules will bridge the gap.
Some doubters have already suggested that we will see a move to a world of ‘spend, spend, spend’ but experiences from other countries who have adopted this change, such as Australia, tend to show that this will not be the case.
So, what will the future be?
It will be around people’s priorities and understanding how the flexibility of the changes can work to your advantage. Essential considerations will be:
- Do you need guarantees of income?
- Are death benefits important to you and your beneficiaries?
- Can you live with any element of investment risk?
Permutations of all three priorities will lead to different solutions for each client.
Annuities, enhanced and fixed term, will provide certainty of income. Guaranteed income drawdown will give certainty of income but remove the investment risk, while still giving direction of assets on death. Flexible drawdown will provide flexibility of income, potential growth on assets and direction of assets on death.
Permutations of these solutions may also be right for some clients who wish to build some guarantees with flexibility as well.
Hooray for pensions!
What is clear is that pensions are back to being in the ‘good books’ again. Currently, tax relief on contributions, employer input being assured through auto-enrolment, 25 per cent of the fund as a tax-free sum have made pensions a sensible means of accumulating in the longer term. Add to this the flexibility of taking benefits out of your fund at tax rates ranging from as low as 0 per cent or as high as an effective 60 per cent means the word ‘pensions’ is favourable again. Remember the amount of tax you pay will be in your control.
The best way to decide on the appropriate route to take is by speaking to a whole of market financial adviser. Making sure you can boost your benefits on a steady route to retirement.
About the author
David Philips is an Independent Financial Adviser with FSC Investment Services. He has 27 years’ experience in the financial advisory industry.
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