George Osborne’s dramatic proposal to liberalise British pensions during the Budget was met with optimism by most advisers, but it has also presented them with some big challenges in the interim.
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.
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.”