2015: the end of the retirement world as we know it?

The Budget threw up the biggest change to retirement planning in living memory. This presents an unbelievable opportunity for advisers, explains Dave Downie.

2015: the end of the pension world as we know it

The Budget threw up the biggest change to retirement planning in living memory. This presents an unbelievable opportunity for advisers. Breaking the ‘pensions are for life' consensus that's prevailed for almost a century requires a sea change in thinking around how people save for, and fund, their life after work.

So what does this add up to?

  • Increase in accessible wealth: The number of potential clients with sufficient investable assets to justify holistic planning advice will soar.
  • More advice needs: A huge demand for advice on achieving sustainable retirement income from a variety of sources.
  • Demand for tax planning: Tax planning will take on even greater importance.
  • More focus on wealth transfer: A greater focus on estate planning as it becomes easier to pass on pension wealth to loved ones.
  • Incentive to save: The attractiveness of pension saving is given a huge boost as perceived barriers to saving are removed.

All in all, this points to a fantastic future for financial planning and advice.

2015 and beyond - so much change, yet so much stays the same
 

From April 2015, the shackles are off in terms of retirement income planning. Gone will be any need to buy an annuity. Gone will be any income limits on drawdown.

Savers will have complete flexibility to take as much or as little from their pension pot as they need, when they need it. But remember it's only those with DC pensions that will enjoy this new found freedom. Even then, some older type schemes may not be able to facilitate what is essentially flexible drawdown without any minimum income requirement.

And the tax regime isn't changing. The annual and lifetime allowances will still constrain pension saving. 25 per cent stays tax-free, but there's still income tax on the balance. Tax thresholds and allowances will still drive behaviour and determine optimum outcomes.

The new pension freedom and choice also brings new responsibilities. The removal of the psychological barrier that pension pots are locked away will naturally bring temptation for savers to dip into them too deeply, too soon - because they can. Yet the fundamental principles of planning for life after work remain the same.

  • Save enough: Retirement savings have to last a long time. This takes more money than most savers think.
  • Manage income: Income must be taken sustainably. Taking too much, too soon will end in tears.
  • Invest appropriately: Investment requires a long term view, to support that sustainable income. The natural inclination for older people is to run to cash deposits, but this will rarely be a sustainable solution over the longer term.
  • Tax planning: The tax framework isn't changing. Using the right wrappers, at the right time, will give more tax-efficient income and wealth transfer outcomes. There's a real danger of people misusing the new flexibility and walking into unnecessary tax.

And there's more change in the pipeline.

  • DB transfer ban? - The imminent ban on transfers from public sector DB schemes to the DC world, and the consultation around extending it to the private sector, could create an options chasm between DB and DC pension savers. This should focus the minds of ‘at retirement' DB members looking for more flexibility by moving to SIPP.
  • Inheritable pensions? - Fewer people buying annuities will mean greater opportunity to pass on pension wealth to loved ones. Add the unlimited access to DC pension pots and we could see an increase in lifetime gifting. And the proposed cut to the current 55% tax charge on lump sum death benefits from crystallised pension pots should help too. The combined results should mean pensions take on much greater prominence in estate planning discussions.

In the meantime
 
Although the brave new world won't exist until 2015, it impacts on retirement planning now. Those already at, or close to, retirement need to take big decisions soon and, with the pensions rule book about to be torn up, years of careful planning may have to be completely rethought in a matter of weeks.

The immediate relaxations to the rules for annuity purchase, capped income drawdown, flexible drawdown and triviality give some welcome interim solutions to ease transition to the new, more flexible, income options when they come. Planning for the future starts now.

So what does this mean for advice?
 

The government's proposed ‘free, impartial, face to face' guidance will usefully highlight the issues facing them and their options. But it won't be enough many savers. Planning needs to start much earlier and look much wider.

Putting decisions about how to manage retirement income back in the hands of savers will swell the demand for advice. And, for many, that means full holistic advice, not just ‘guidance' at the point of retirement.

All this new found freedom still needs to be balanced against the tax on taking large payments from a pension. The tax rules on taking income aren't changing. There will still be the opportunity to take 25% tax free cash. Any income will then be added to other income and taxed at the marginal rate.

This is where advice will be invaluable. Providing a sustainable stream of ‘income' in a tax efficient manner is what many clients will be seeking. Managing allowances and monitoring those key thresholds will be vital. And it's not just about pensions. Many clients will have a range of savings acquired over their working life. This provides great tax planning flexibility but clients will require help to decide which pot to take their retirement income from.

Watch this space
 
There's a long road to travel before the proposals become reality. We probably won't see the outcome of the consultation until late summer. And the fine detail may not be available until the Chancellor's Autumn Statement in December.

 


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