Speculation of mass pension withdrawals and a generation of savers condemned (by themselves, presumably) to an impoverished retirement on state benefits was feverishly reported ahead of 6 April.
It was catalysed by chancellor George Osborne’s words in his Budget just 12 months earlier: “Let me be clear. No one ever needs to buy an annuity again,” and then fuelled by opinion from a diverse array of commentators, some with vested interests.
Unpredictable
Faced with unprecedented changes and with few facts available, aside from a very clear and immediate decline of annuity sales, the truth is that few managed to predict the behaviour of pension savers with any degree of accuracy. Those savers typically acted in four different ways. They either:
• Withdrew all or significant proportions of their pension savings
• Started flexi-access drawdown (Fad)
• Bought an annuity
• Did nothing and carried on as before
What happened post-6 April is not necessarily a guide to how pension savers will behave in the future. The unprecedented magnitude of the change (although it must be noted again, perhaps for the final time, that there was no compulsory annuitisation in force pre-April 2015) undoubtedly resulted in some pension savers making irrational decisions. This was despite widespread media coverage, sometimes bordering on hysterical, on the dangers and tax implications of withdrawing a pension fund in full.
History should not judge too harshly the decisions of those who chose to withdraw all or large parts of their pension funds as soon as they were able to. The vast majority who did had relatively small fund sizes. They are extremely unlikely to have benefited from financial advice at the start of their pension saving, and most likely were unengaged with their pension while they paid in to it. Even the most simple of pensions can be complex for many to understand.
Basic comprehension of pensions can often be limited to: “I can’t get the money until I’m older, I can get some tax-free cash when I retire, when I retire I still can’t get the money.” That is not intended to be condescending but is instead the uncomfortable truth of the lack of awareness among many pension savers who, despite the lack of knowledge, are driven by an awareness that they need to save something for their retirement. But they are not the target market for financial advice.
So it should come as no surprise that after April 2015 a sizeable number of pension savers saw access to their pension as something akin to a windfall, and made a decision for the moment rather than for the future. Perhaps there was also fear that this sudden access would be withdrawn again in the future.
The behaviour of those who eschewed a full withdrawal or annuitisation by choosing flexi-access drawdown has, to date, largely mirrored the behaviour of those who chose drawdown pre-April 2015. In varying proportions those savers typically:
• Withdraw all or part of their available tax-free lump sum, and do nothing
• Withdraw all or part of their available tax-free lump sum, and take regular or ad hoc income
• Maximise their income through regular partial withdrawals of both income and tax-free lump sum.
Amid all three options are a number of savers who also continue, where possible, to make contributions into their pension. And herein lies the future of pensions, via flexi-access drawdown, as a flexible foundation for retirement.
“A pension is no different to other savings”
That statement needs to be qualified, lest Money Management’s postbox becomes full to bursting point with complaints and corrections. Around the edges, and with their structure based around some fundamental principles, pensions have many differences to other savings. Tax relief on contributions, assets you can and cannot invest in, no accessibility until a certain age, differing tax treatment on withdrawal of the accumulated capital and upon death are but a few. There are rules – and not forgetting regulation – so complex that pension savers need financial advice to maximise their benefits and potential.
At their heart, pensions are simply a means of accumulating money to be withdrawn again at some point in the future. And when the chancellor relaxed the rules on how that money could be withdrawn, that accessibility handed pensions the right to be viewed by savers and retirees as something akin to any other investment or savings account.
How to save
The important decisions for advisers and their clients have always been when to choose one form of saving over another. That choice is, of course, different for every individual. It is based upon personal circumstances, risk tolerance, future plans and most likely calls upon capital and income.
It has always been this way, and experienced advisers will without thinking be forming their recommendations and order of priority in their mind as early as when they meet a client for the first time and start to learn more about them. It comes naturally and is instinctive.
Before April 2015 many of those choices were removed at the point of a client’s retirement, especially for those who chose to annuitise their pension fund. That is not the case today, and although clients’ financial priorities change towards their later years, the accessibility of pensions means that they can continue to play an active role during retirement years.
Just six months into pension freedoms and there is already good evidence that advisers are starting to do just that. Unfortunately what’s also evident is that there are regulatory constraints on how far advisers are able to make recommendations. That said, it is still early days and is perhaps understandable that the controls are stricter at the outset while this new market is relatively immature.
The meaning of retirement has changed, and pensions are now fully able to meet that new, flexible retirement – a retirement where savers continue to work and continue to save, for both the long and short term. Far from just being longer term vehicles to save for retirement income, pensions can now be used more creatively, such as:
Short-term saving
It is possible to save into cash deposits within a Sipp, benefit from tax relief, and withdraw the funds in a tax efficient manner when they’re required.
Alongside other longer term investments there is no longer any reason why these types of savings cannot be made into a pension if the numbers stack up.
Short-term access and emergency fund
It may take a while for the chancellor’s vision of ‘pensions as bank accounts’ to be realised, but with a growing number of Sipp providers able to offer swift access to capital, the dynamic has changed. Pension savers can now view their pension funds as capital or income to be accessed at short notice.
Inter-generational planning
The tax benefits available to beneficiaries, for uncrystallised funds and before age 75, are unprecedented. Advisers are able to plan estates and entire portfolios in anticipation of death before age 75, and then shift the use of different tax wrappers after this age if estate preservation is the client’s priority.
And there are countless more options. The potential for retirement advice is therefore far more holistic than it may have been before, and the options at a client’s disposal are certainly far greater.
The baby boomer generation may be passing, but there’s a huge demographic queuing up at the perfect age to present advisers with an incredible opportunity to service their needs. This Chart shows the structure of age from birth to 84 between men and women.
The options and solutions they have at their disposal, delivered by pension freedoms, have never been greater.
Greg Kingston is head of insight at Suffolk Life
