This new flexibility is most welcome as it will benefit those people with small pension pots. Advisers must now, more than ever, consider the suitability of more flexible arrangements for their clients in terms of their income needs and objectives.
In some cases this may mean the adviser having to constrain a client’s desire to withdraw from their pension funds at too high a rate where this will not be in the client’s long term interests. Cash-flow modelling will be a valuable tool in achieving this.
Advisers can get a good understanding of the changes from HMRC’s Freedom and Choice in Pensions’ publication.
For those who need security of income that will not expire before they do, an annuity may still be appropriate, and some product development in this area is likely to take place. However, those who want more flexibility will find the idea of unconstrained drawdown attractive. In the interim, I expect an increase in the use of temporary products, with guarantees but no tie-in, as with an annuity.
With greater access to drawdown, there is likely to be more focus on underlying investments with lower volatility to sustain an income, as opposed to just stripping money out.
Tax planning opportunities will also become more prevalent. For example, putting money into a pension shortly before retirement, with a view to taking all the money out soon afterwards, especially if moving from higher to basic rate. In addition, if clients are in a position to defer drawing benefits until 2015, it would be worth thinking about access to full flexibility at that time.
It is worth noting the minimum age to access benefits is expected to rise in the future. It is proposed to rise from 55 to 56 in 2018, and then to 57 in 2028.
But a word of caution on the lifetime allowance front, where I wonder if the reductions have stopped. They are down from £1.5m to £1.25m – having previously been £1.8m and higher still. Is this an area that may change? With pensions being made more attractive, would we be surprised by a further reduction in the future?
There was a lot of talk about “free, face-to-face guidance” in the Budget, but this will not be the same as fully-regulated advice.
However, the likelihood that clients will become better informed is to be welcomed. Advisers need to understand their retirement needs and help them make the most of the added flexibility now available.
Simon Thomas is head of policy of Tenet Group
