Sweeping changes tear up the rule book
And so it begins. April 6, 2015 is a day that few in the retirement industry had predicted, as individuals are handed unprecedented freedom to access their defined contribution (DC) pensions. The biggest pension revolution we’ve seen in our lifetime, it gives those over the age of 55 greater choice in how they manage their retirement savings.
At first, the options available seem straightforward. Individuals will still be able to convert their pension pot into a secure income in the form of an annuity, or remain invested and drawdown an income. The fundamental change is that under the new rules, income or lump sums can be withdrawn without a cap, albeit with tax implications. Twenty-five per cent will continue to be tax free and the rest subject to income tax. Significant new tax breaks will allow DC pots to be passed on and the pension wrapper used to reduce inheritance tax for surviving spouses and children.
Prior to the 2014 Budget announcement, the conventional annuities market was worth approximately £12 billion per annum. The reforms are expected to see a five-fold increase in those opting for drawdown, soaring from 6% at the time of the Budget, to 30% in 2015.
Despite the anticipated decline in annuities, securing a guaranteed income is likely to remain the priority for retirees. We have seen some innovation and expect to see more over the course of the next year, as providers offer new products in response. These will be designed to deliver regular income payments guaranteed not to fall, but which will also rise if investments perform well. As distributors of these products, platforms have the opportunity to be at the forefront of this change.
When announcing the reforms, George Osborne promised free and impartial guidance in the form of the ‘guidance guarantee’. In January 2015, Pension Wise was unveiled and it was announced that the new service would be jointly delivered by The Pensions Advisory Service (TPAS) and the Citizens Advice Bureau.
Questions remain around the quality of the guidance Pension Wise will offer. Given the huge changes and short preparation time, it is expected that one of the main outcomes for individuals will be to obtain regulated financial advice. For those firms wishing to engage in this activity, it represents a great opportunity. Where individuals require, or are guided towards, regulated financial advice, the Money Advice Service will have a directory of advisers for the individual to access.
Looking forward, next month’s General Election inevitably creates an air of uncertainty. That said, all political parties appear committed to the pension reforms, although tweaks are probably to be expected. The next fundamental change could be on pension tax relief, which all the main parties seem to be set on reviewing.