The pension freedoms came along at a time when annuity values were at rock bottom and the pensions market was perceived as in need of a shakeup.
Introducing more flexibility into pensions has presented many advisers and their clients with challenges. Many more options at the decumulation stage can be confusing but, on the other hand, retirees may feel more in control of the money they have worked their whole life to save.
It is important to understand what the freedoms mean for you the client.
Corrado Pistarino, chief investment officer for Foresters Friendly Society, acknowledges: “Saving for retirement is one of the most debated problems in modern society. A sustainable system ensures intergenerational fairness and, by and large, social cohesion.
“From a macroeconomic perspective, retirement savings represent a large share of the capital stock in the economy, supporting growth through the process of capital accumulation and increase in productivity.”
He adds: “Planning for life after work means building up a suitable size fund in order to maintain a certain standard of living.”
However, Peter Bradshaw, national accounts director at Selectapension, suggests: “I think pensions freedoms, basically, is a bit of an illusion. It’s changed the landscape, for sure.
“I suppose, yes, you’ve got more choice but you’ve got more responsibility.”
This guide answers questions advisers and providers frequently face in relation to the pension reforms and whether there is more that both the industry and government can do to make the transition from accumulation to decumulation simpler for clients.
The pension reforms have introduced far more options for funding retirement.
Many of these can be used alone or in combination with other pension products, while some may be more suited to those in the early years of retirement, to be replaced by another product when they get older.
Understanding what your needs will be when you retire and the type of pension you have been saving into throughout their life, will naturally whittle down the most suitable product for you.
The products available to retirees are:
- Fixed Term Annuity
- Drawdown (existing capped and new flexible)
- Uncrystallised Funds Pension Lump Sums (UFPLS)
- And a number of phased variations or combinations of the above.
In itself, drawdown is not a new concept, as Gareth James, head of technical resources at AJ Bell, reminds people.
“It is important to remember that drawdown has been allowing savers to alter the amount they take from their pension for more than 20 years. What has changed is the complete removal of government set income limits, and drawdown being seen as a viable option by many more savers than was the case pre-freedoms,” he explains.
Old product, new tricks
Among that list is an entirely new product though.
Mr James notes: “Uncrystallised Funds Pension Lump Sums (UFPLS) is the one completely new option which has taken off.
“This is simply where savers take ad-hoc lump sums directly from their pension rather than setting up a regular income stream. A quarter of each UFPLS withdrawal is tax-free, with the rest taxed at the saver’s marginal rate.”
He observes: “UFPLS has been particularly popular with those holding more old-fashioned pensions which don’t offer drawdown as an option, as it is their only way to make use of the freedoms without transferring to a new provider.”
Fiona Tait, technical director at Intelligent Pensions, outlines three main retirement options for individuals with defined contribution (DC) pension plans, ranging from “the extreme option of taking it all in one go at outset, to the more traditional route of spreading it as income across the remainder of their lives”.
She says: “UFPLS may be used to achieve the former approach, or to provide a series of tax-efficient lump sum withdrawals over time; while Flexi-Access Drawdown (FAD) and annuities may be used to provide regular income.”
Then there is the ability to combine some of the options.
“These options may also be used in combination either sequentially or in tandem; commonly FAD or UFPLS will be used earlier in retirement to maintain flexibility, while an annuity may be used later on when income needs are more predictable,” she points out.
“UFPLS and FAD are not available to members of defined benefit (DB) arrangements and members of those schemes have to transfer to a DC arrangement in advance of taking benefits, if the benefit of having the additional flexibility outweighs the advantage of the guarantees that apply to benefits withdrawn from a DB scheme.”
The pension freedoms are still relatively recent, which means advisers’ clients will have plenty of questions about what this means for their later life planning.
Being prepared to answer some of the most commonly asked questions should help advisers clarify to clients the choices they face when it comes to funding their retirement and reassure them about their financial future, often when it matters most.
Given that no-one knows how long they are going to live into retirement, it is not surprising that some of the questions advisers face are around how long the pension pot will last.
Neil Adams, pensions and investments expert at Drewberry, says: “The foremost question clients ask now drawdown is more widely available is ‘When will my money run out?’
“Unfortunately, not even the best advisers have a crystal ball but it’s possible to provide a rough model of when the money may run out judging by the size of your pot, potential investment returns and how much income you want to draw.”
The most frequent question faced by both advisers and providers is ‘when can I have my money?’ However, the answers may be different from each source.
“While it may seem an impossible question to answer initially, there are plenty of tools available which mean we can help you come up with a realistic estimate.”
Using holistic financial planning and cash flow modeling we can answer the questions such as:
‘I want £35,000 this year, where do I get it from?’ And the pension may only be part of that for some people.
To be fair, not all of our clients have other pots than pensions and some of them are taking smaller incomes from their pension and, in some cases, this is probably a minority. Some are taking a very high level of income from their pension.”
So the question becomes “Here’s what I want to do, how do I do it?”
This may be a more common query among clients who are familiar with their financial circumstances, and have a definite idea of their goals for retirement.
Typical questions asked to advisers and providers on pension freedoms
- What happens to the money in my pension if I die?
- What are my pension options?
- When can I access the money in my pension?
- How do I access my pension?
- Can I take my pension and keep on working?
- What is the Money Purchase Annual Allowance?
- How much will my pot get me?
- Can I afford to retire?
- Do I have to take advice?
We are frequently asked by his clients about what they should do but this is largely dependent on individual circumstances.
But some people have questions about specific products, such as annuities.
Are annuities poor value? As an investment, they probably are but as a guaranteed income for life, i.e. an insurance against living too long, they still have an important place in financial planning.
Another question typically faced is “What level of income can I take?”.
Answer, with annuities this will be a figure depending on the pot and the options included, but with drawdown this will depend on the asset mix, attitude to risk and life expectancy.”
So far this guide has highlighted some of the misunderstandings which have occurred among clients since the freedoms came in, while acknowledging the usefulness of more flexibility at retirement.
There have been numerous concerns, mainly voiced by advisers and those within the pensions industry that without more government and industry help, many individuals will succumb to pension’s scams.
One of the steps being taken by both the industry and the Department for Work and Pensions is the Pensions Dashboard, which aims to help people keep track of all the pension pots they have accumulated throughout their working life.
This is on the basis that a working adult will have, on average, 11 different jobs during their lifetime and that £400m of pensions go unclaimed.
The Dashboard is set to launch in 2019 but with that date some way off, there is a chance those seeking help with their retirement plans this year will be left floundering.
All of us in financial services – from advisers, to product and investment providers, right up to the regulator – should have one core objective and that is to make pensions understandable to everyone.
Anthony Rafferty, managing director of Origo, explains: “The Pensions Dashboard could bring together details of every retirement plan a person holds in one, accessible and simple screen so that they can be fully aware of the provisions they have now.
“And this could be just the first step in helping our population prepare for, and understand the costs of, retirement.”
But can and should the government and industry be doing more to make the transition from accumulation to decumulation any easier and simpler for clients?
Ticket to retirement
Verona Smith, head of platform at Seven Investment Management, asserts: “All of us in financial services – from advisers, to product and investment providers, right up to the regulator – should have one core objective and that is to make pensions understandable to everyone.
“We need to remove the complication, jargon and general confusion.”
She continues: “Everyone should understand that their pension is their ticket to the retirement lifestyle that they desire.
“Unless you know the winning numbers for next week’s lottery your pension is your answer to your own retirement dreams.”
Pension freedom is no guarantee of a richer retirement, confirms Stephen Lowe, group communications director at Just.
“People have more choices, but need to understand their options to avoid the many pitfalls – exceeding their own capacity for investment risk, overpaying tax and falling for scams,” he points out.
“Professional advice is one way to overcome lack of engagement and knowledge about the options and how the market works. Impartial guidance through Pension Wise is available for free but too few take it.
“Our view is that, like auto-enrolment that has seen pension membership rise significantly, guidance should become the default option unless people explicitly opt out.”
For many, better communication from the pensions industry is the answer.
In the meantime talk to Broadleaf for answers to your pension issues.