Proposed pension changes provide greater flexibility

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.

By giving people greater control over their long-term finances, the government is sending a strong message of support in favour of people saving more for the future, especially when you look at the Isa changes.

Providing better flexibility to allocate Isa capital as savers see fit – between cash and investments without restriction – allows people to begin engaging with their finances in a more direct way. Few people begin saving with the help of an adviser, so providing the tools, flexibility and education in order to engage first-time savers has to be the way forward in securing the financial wellbeing of future generations.

James Priday is director at Prydis Wealth and founder of Strawberry Invest

PENSION CHANGES: WHAT IS HAPPENING?

In the 2014 Budget statement chancellor George Osborne announced an overhaul of the existing pension system. These changes included:

From March 27 2014

– The amount of overall pension wealth you can take as a lump sum rose from £18,000 to £30,000.

– The amount of guaranteed income needed in retirement to access flexible drawdown was reduced from £20,000 a year to £12,000 a year.

– The maximum amount you can take out each year from a capped drawdown arrangement was increased from 120 per cent to 150 per cent of an equivalent annuity.

– The size of a small pension pot that you can take as a lump sum, regardless of your total pension wealth, rose from £2,000 to £10,000.

– The number of personal pension pots you can take as a lump sum under the small pot rules, increased from two to three.

From April 2015 (subject to consultation):

The government states: “From age 55, whatever the size of a person’s defined-contribution pension pot, we propose that they’ll be able to take it how they want, subject to their marginal rate of income tax in that year. 25 per cent of their pot will remain tax-free.”

“People who continue to want the security of annuities will be able to purchase one and people who want greater control over their finances can drawdown their pensions as they see fit. Those who want to keep their pensions invested and drawdown from it over time will be able to do so.”

Source: HMRC