The news gets better and better for long-term savings.
The chancellor’s helpful (and widely anticipated) announcement about the taxation of inherited pensions adds further weight to the message that we all need to save as soon as possible, as much as possible and for as long as possible.
I have written previously about how difficult it will be to convey effectively the bewildering choices available at retirement; with that in mind, I will outline here the implications for the execution of whichever choices are made.
The options appear to be: remaining in a pension (often meaning a transfer and new terms); remaining in a pension but taking tax-free cash (as cash or by investing in an ISA) and leaving the rest to grow; remaining in a pension but taking tax-free cash (as cash or by investing in an ISA) and drawing down from the remaining fund; taking tax-free cash (as cash or by investing in an ISA) and taking an annuity; a combination of the above (with, of course, the flexibility to change course at any time); or taking the entire amount as a lump sum.
The illustration and administration of any number of these will not be easy. To say that providing all the options will be a considerable challenge is a significant understatement. Regardless of the complexities involved, platforms will be expected to deliver every possibility.
And while many platforms will be ready in April 2015, some will not. The requirements for April, however, will just be the beginning.
There is already much work underway in the industry to develop further support to the options above.
The considerations are many. How does one decide what proportion of income should be withdrawn from Isa versus pension? Should the proportions change over time? How easily can these changes be implemented? Advisors now have to consider a new inheritance tax treatment and a new annual allowance regime, but can advisers and clients depend on these changes when building financial plans?
Also, advisers will want to relate the level of drawdown to their expectations of fund performance and will wish to integrate financial planning tools with platforms so that they can track real outcomes against their plans and then make adjustments.
Clients and advisers will wish to consider options that provide some assurance – or even guarantees – with respect to capital and/or income.
Variable annuities, ‘third way’ annuities and ‘with profits’ will all receive a boost in interest. In spite of all the benefits to be enjoyed in drawdown, there will remain a steady demand for certainty.
In the US, conventional pension annuities continue to decline, but deferred income annuities appear to be growing in popularity. I think they will be readily available in the UK market within the year.
Advisers will also expect them to work on platforms. As implied, they will provide a guaranteed income from a given future date in exchange for a regular premium or a lump sum payment.
The difficulty will be integrating all these emerging solutions with the client account on a platform alongside the choice of investment strategies that could be adopted.
It feels as though the opportunities for advisers and the complexity of the challenge for platforms are limitless.
Ultimately, this is good news for all concerned (especially IT providers and staff), but the sudden and dramatic increase in the number of options available must increase the risk – for advisers, clients and platforms – of getting it wrong.
Meanwhile, platforms will have to plan to offer this bewildering array of options at retirement through direct and advised channels.
Whatever the result, it will be better for all if the solution can be executed simply and in one place.
Hugo Thorman is chief executive of Ascentric
