The recent changes to both Isas and pensions are great for almost everyone. Raising the Isa limit to £15,000 per year should mean people are able to save more into the most widely understood tax-efficient savings vehicle.
The greater pension flexibility will give people more freedom and understanding about when and how they are able to extract the benefits from the years of accumulated pension contributions.
This should therefore mean more people are happy to build up savings within the pension environment, knowing they are free to get their hands on it once they reach 55.
The pension changes also mean there will be fewer people buying annuities, so there will be a greater need for investment management and advice beyond a person’s retirement date.
It is unlikely there will be a massive tranche of people spending their entire pension pots in one go, as some have suggested. It is, then, probable that advisers and investment managers will need to be more creative in finding investments that provide decent yields, yet will be suitable for those who may previously have purchased an annuity.
This is no mean feat in today’s markets, as they are unlikely to be the sort of people with a large tolerance for risk or loss.
From April 2015, retirees may draw from their pensions much more freely, and will be able to make changes to the amount of regular withdrawals more frequently, which is inevitably going to make it more difficult for advisers to establish a fixed investment plan from the outset.
Clear instructions
Advisers will therefore need to make it clear to their clients that any large unplanned requests for cash or major changes to the regular withdrawals, will result in the chosen investment strategy being affected. This could lead to investments being sold at inopportune times if there is insufficient cash reserve to make good the request.
Cashflow analysis will become much more prevalent and where those approaching retirement may see the need to draw ad-hoc lump sums in the future, advisers should look to ensure that there is a sufficient cash holding built into the investment strategy. This should protect more volatile investments, allowing them to remain invested until a more opportune time to take returns arises.
Giving greater flexibility to people in retirement to draw from their savings allows them to react to their own changing circumstances, and given that there will be complete flexibility to the set amount of pension withdrawal, investment strategies should almost certainly look more closely at how people’s time horizons could change during retirement.
It would be wise to spend more time with clients, reviewing their circumstances, looking at the future and discussing possible eventualities that could cause a shift in their investment time horizon, and could significantly impact their longer-term retirement income.
It should be noted, of course, that while there will be a reduction in those using annuities, it may also open the door for greater competition and innovation in this space, to the ultimate benefit of future retirees. Annuities can still provide a guaranteed income from a single, simple product and this will continue to hold significant appeal to many people.
