In March, George Osborne delivered some of the biggest reforms to the pensions landscape while making his Budget speech.
These included removing the requirement to buy an annuity, and the possibility of taking all your pension savings in one go – subject to your marginal tax rate – and an increase in the minimum age at which people can access their retirement savings to 57 from 2028.
For those already investing in self invested personal pensions (Sipps) these are not huge alterations to the products already available, but they do mean that the decumulation phase of retirement, can in theory be as flexible as the accumulation phase within a Sipp.
In his speech, George Osborne stated the Budget was one for “the makers, the doers and the savers”, and the far-reaching reforms to the pensions world coincided with generous alternative saving options for people alongside pensions.
These include the New Isa (Nisa) that will come into force in July and the introduction, from January 2015, of a range of “fixed-rate market-leading savings bonds” for people aged 65 or older, to be offered through National Savings and Investments (NS&I).
The question is, with all these new and flexible savings options, what does that mean for the traditional Sipp, if anything at all?
Ken Wrench, director of London & Colonial, suggests the Budget is “very good news” for the Sipp market, as the additional freedom afforded by the proposed new regulations means many more people will be encouraged into the pensions market.
He says: “Pensions are now firmly on the agenda, which is good news for everyone. The freedom from a compulsory annuity requirement has opened up the market massively and there has never been a better time to invest in a personal pension because the options at retirement have never been more flexible or more attractive.”
However, with the changes to the pensions regime under consultation until June 11, these alterations are not necessarily set in stone.
John Fox, managing director of Liberty Sipp, notes: “The pension world is slowly digesting the huge changes announced in the Budget, and has already embarked on a period of Perestroika in response. As a result more people are likely to take a greater interest in personal pensions, particularly Sipps. Pensions will increasingly be seen as more of a living product rather than a repository for dead money.”
He adds: “The investment choice that a Sipp provides, combined with the government’s commitment not to mess around with a still generous tax relief system, will mean that Sipps will still be sufficiently differentiated from an Isa.
“In most cases, the management of Sipp and Isa allowances in tandem could, for the savvy investor, create much more interest across the saving spectrum for the general public.”
Andy Leggett, head of Sipp business development at Barnett Waddingham, points out the changes to drawdown by eliminating any link to annuity rates will make the process much more flexible, making it popular with members of defined contribution schemes and lead to the greater use of Sipps in retirement. He adds: “The financial planning opportunities will be much greater. Drawdown will fit better with modern retirement patterns where many continue working after age 65 but typically on a part-time basis. It will also enable people to meet one-off expenses far better than a regular income allows, whether this is a treat or a crisis.
“There are already many other countries whose pension rules allow similar options to those proposed in the Budget – so while this is new to the UK, it is not untested. It is likely an increasing number of people will use drawdown as part of more sophisticated and flexible retirement plans.
“With unlimited withdrawals possible, we may see people commonly maintaining funds in drawdown right up to death as an emergency fund for late in life. It is also likely that more people will use drawdown with smaller funds but in combination with annuities and Isas.”
This flexibility may not be the end of pensions as some suggest, but perhaps the start of a new golden age.
As Mr Fox explains: “As pensions become more accessible and understandable to a public that previously avoided them like the plague, Sipps will become the democratic way for Britons to engage with, rather than ignore, their retirement planning.”
Nyree Stewart is features editor at Investment Adviser
