Channel 4 Dispatches; “How to blow your pension”, aired at 8:00PM on 12th January, covered the pension reforms in April 2015 and the potential consequences. If you get the opportunity, it is worth a view as it poses a number of issues that could seriously affect the newly retired.
To put the reforms into a nutshell, from April 2015, once you are past age 55, you could take out your entire private pension fund, less income tax and do what you wanted with it. Steve Webb, the pension’s minister, famously suggested blowing it on a Lamborghini, but I would suspect that most people will have a much less exotic plan.
Before the reform, most people with pension assets were only able to access 25% as cash with the balance payable as a long term income, normally for life, conventionally packaged as an annuity. Once an annuity is taken, there was no additional access to capital, no ability to change providers and no real opportunity to change the income received.
The trade paper, Financial Adviser, commented on the programme with the headline “Millions of savers being targeted by unregulated firms”, as approximately £6Bn of pension assets are potentially accessed in the first 4 months following the reforms. For scammers and other conmen, this is a target of considerable promise! The programme showed a number of unsuitable investment schemes directed to the over 55 market including car parking spaces in the Middle East and forestry in South America. The full article is at http://www.ftadviser.com/2015/01/13/pensions/annuities/millions-of-savers-being-targeted-by-unregulated-firms-MOYmqYQDvUE7w6vRdnM0kI/article-1.html?ftar=true and the programme is on 4OD, http://www.channel4.com/programmes/dispatches/on-demand/59588-002
If you are about to retire in the next few months, or you know someone who is not too far from retirement, please consider the following bullet points.
- Think carefully before you just extract all of your pensions as cash; if you are really unlucky you might end up paying 45% tax, when spreading the income over more than one tax year might reduce the tax bill to nothing.
- Think about how much capital would be useful to actually meet a need, like paying down your mortgage or paying off credit card debt. Using a mixture of tax free cash and the “small pot” rules, you may be able to increase the total capital you can extract.
- Although annuities are unfashionable at the moment, they are cheap to buy, represent low risk, high security and prevent you from running out of income if you live longer than expected. Most people under-estimate their longevity by 5 to 8 years.
- Drawdown schemes are currently more costly to establish and run than an annuity; that is the price of flexibility. The FCA had previously stated that they consider it unlikely that such products would represent best advice for pension funds below £100,000. On the 13th November, FCA Head of Investment, David Geale suggested £50,000 was the current poor value threshold at the Pension Bill Committee hearing. Unless cheaper schemes are developed quickly, the FCA is unlikely to change its position further.
- So far, we have been told unofficially that two providers expect to have a “Flexi-Drawdown” Scheme in place for April 2015. Advisers and retirees will need to keep an ear to the ground, as a new product from another provider may change the environment for the better.
- The big unknowns that used to exist still exist! How long are you going to live? How long will your money last? What will inflation be over the years until your demise? Some form of “long stop” still seems sensible, which suggests that some annuity income is wise.
- As there are more choices and more variables to take into account, professional advice becomes more important. The guidance guarantee offers you the choice of online, telephone or face to face guidance before you take any of your pension options. They cannot offer formal, regulated advice; they offer unbiased information.
*******
If you are about to make a significant choice over pensions, either before or at retirement, please contact us on 01223 792196 for independent, regulated advice.
_________________________________________________________