Bridging the gap to the revolution

While the added flexibility was generally lauded as a giant step forward for UK retirement planning, until the government’s consultation concludes and the revolution is crystallised everything is still very much up in the air.

In April 2015, which is the date that the new rules will come into effect, advisers and their clients will know where they stand, but until then those reaching retirement find themselves in limbo.

For those savers with smaller pots, the immediate changes that came into effect within weeks of the Budget mean any single pot of £10,000 or less, and total pension saving of up to £30,000, can be taken as cash under increased trivial commutation limits.

Drawdown was also boosted, with the ‘capped drawdown’ upper income threshold increased from 120 per cent to 150 per cent of equivalent annuity rates and the minimum earnings threshold to access unlimited flexible drawdown dropped from £20,000 to £12,000 a year.

But this is just the tip of the iceberg ahead of the wider reforms that will mean any pension can be taken as cash without penalty tax charges applied, opening up a plethora of income options both within and beyond the traditional cluster of at-retirement products.

With revolutionary changes seemingly just around the corner, the question facing many advisers is whether to wait before making a decision and, if so, what do to in the interim.

Temporary solutions

Given the current circumstances, temporary solutions like one-year fixed term annuities have been launched to cater to the growing market of at-retirement clients wanting access to their pension cash while keeping their options open ahead of the big changes next year.

These products have been advertised as a useful stop-gap for recent pensioners requiring income from their retirement savings before the new rules are introduced.

But with public confidence in annuities seemingly at rock bottom, others have favoured alternative methods to draw retirement income in this one-year transitional period, such as sticking to cash or investing the money in a low-risk investment portfolio via income drawdown.

For David Gibson, director of Gibson Financial Planning, one-year annuities, which are actually technically drawdown plans, are not very client-friendly as they will eventually lead to two separate charges.

“The one-year annuity is an option but if you take advice you will probably have two sets of advice charges to pay – one now and one next year.”

He is also hesitant to lock clients into a longer-term annuity, particularly as he expects rates to rise next year and therefore prefers to advise his clients to be patient for now.

He adds: “The flexibility in how a client takes their income is worth waiting until next April.

“We do not have any clients who cannot wait until then and I am advising them to hold off until the new rules are in place. People who do need to do something right away might well have a tough call to make.”

Carbon Financial’s Richard Wadsworth, who compared the previous pension regime to “parents dishing out pocket money”, is delighted with the government’s proposed changes but also wary that they are still subject to consultation and therefore not guaranteed.

In the interim, however, he says most of his clients will not be affected because they have the mandatory £12,000 of secure income required to qualify for flexible drawdown. Such clients, he added, could effectively access the April 2015 rules now by “stripping out all their funds”.

According to Mr Wadsworth, clients who want a guaranteed annuity will not be affected by the changes next year.

Indeed, he says the changes have only resulted in a complicated predicament for the few clients an adviser might have that require full immediate access to their pension funds, who do not qualify for flexible drawdown and do not want an annuity.

“I generally do not like the temporary pension income options available, seeing them as often being expensive and cumbersome and at the very least difficult to understand, and so I would seek to avoid things like temporary annuities or guaranteed income and capital arrangements.

“My preference would be to look at a client’s wider affairs and see where else money could be drawn from to bridge the gap between now and April 2015. Could it come from investments, cash, or even by continuing to work for a few more months?

“If those options were not available, or were unpalatable, my next consideration might be to access the pension lump sum – tax-free cash – available in the pension arrangement, but leaving the balance of the pension untouched.”

In addition to the core reforms, the Treasury has also extended the period of time a retiree has to firm up their income arrangements after crystallising their pension by taking the lump-sum from six months to 18 months, effectively pushing the deadline well beyond next April.

Annuities risk

Bridging the gap is also the preferred strategy for Minesh Patel of EA Solutions, who is advising his at-retirement clients to wait for the legislation to “unfold fully” before committing to anything.

This is feasible, he adds, because most of his clients at this age were either still working or in possession of assets that could fund the gap between now and next April.

But while this is his favoured approach and one that offers a way out of annuities, a product he fears will later lead to complaints from disgruntled clients, for less affluent clients he accepts that there are few other alternatives.

The falling popularity of annuities, he adds, will cause rates to plummet even further, yet for some they still represented the most secure and best possible option.

“I personally see great risk at present in advising clients to lock into annuities because of potential allegations of unsuitable advice.

“However, for the less affluent, and where continuing to work is not an option, annuities are still the most suitable form of taking retirement income, although income drawdown or phased retirement should also be considered given the new flexibility available in 2015.”

Like Mr Patel, Philip Haden, director of McCarthy Taylor, prefers to hold off until April 2015 before committing a client to a particular retirement product.

Despite all the excitement that followed the Budget’s revolutionary pension plans, he describes the current transitional period as “difficult”, with those requiring an immediate income or lump sum less flexible in terms of waiting it out.

In such cases, he says the normal process of fully reviewing each client’s individual circumstance and objectives would be followed, as to best establish the most efficient way to draw from ones retirement fund.

If, after careful analysis, it became clear that an annuity was the best option, he would discuss the changes set to happen next year to try and delay, although he concedes that the final decision was down to the client.

According to Mr Haden, there will always be a market for annuities because of the guarantees they provide, though in an ideal scenario he would prefer his clients to consider drawdown or “third way products” while they wait for confirmation on the government’s proposals.

“Drawdown or ‘third way’ products can be the ideal solution as a way to provide a lump sum and/or income but to keep the options open.

“An annuity could be purchased at a later date if needed but the reverse cannot be done, so great care needs to be taken and advice sought at what I feel is one of the most important times of a client’s life.

“Even if the decision is to delay, the investments within a pension still need to be reviewed to ensure they are in the right place in case benefits are taken in the next 12 months.”