Gearing up for the brave new world

The anticipated demise of the annuity market, following the wide-ranging pension reforms announced in the March Budget, has filled IFAs around the country with new-found enthusiasm for retirement planning.

As pensioners turn away from annuities, towards drawdown and other alternatives ,they will surely need more ongoing financial advice, so the argument goes. A potential cloud to spoil this otherwise sunny picture could come in the form of in-house income drawdown services offered by pension providers.

Instead of members of occupational defined contribution schemes being pushed into the open retail market, schemes may instead offer their own form of drawdown solution. This, at least, was the idea proposed by Teresa Fritz, consumer advice consultant at the Financial Services Consumer Panel (FSCP), who suggests that this would be better for members than leaving them at the mercy of retail market options. So is this a real threat or should IFAs start gearing up for a flurry in retirement business?

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In-house threat

The government has proposed that pensioners be allowed to have greater freedom over their defined contribution pension savings. The concern that the FSCP and other consumer groups have expressed following the rule changes is that poor decisions taken with this freedom could leave them worse off than with an annuity. Given that the new rules – which are still at the consultation phase and have not been finalised – include permitting 100 per cent of a pension to be taken as cash lump sum (of which only 25 per cent would be tax free, as was previously the case), the understandable worry is that the money could be used to buy risky investments – or just spent. If pensioners are presented with a drawdown service by their own provider – or company in the case of an occupational scheme – this problem could be avoided. But with flexibility around drawdown increasing, one-to-one financial planning advice would still be required, as the government has recognised with the proposal that individual guidance becomes mandatory.

With more choice comes more responsibility – and the need for more help. If pensioners opt for drawdown, rather than taking the cash and investing it in conventional savings products, from next year onwards they could take up to 150 per cent of GAD rates per year in income – which would amount to 4.5 per cent at current rates.

If they have £12,000 of guaranteed income from elsewhere, then even this restriction is limited. Occupational schemes which offer an in-house drawdown option will have to take great care to ensure members understand how to balance risk and income levels. They should also consider all the options available to them – not just drawdown.

As advisers know, this can only be done with proper, individual, face-to-face advice, involving cash flow planning. This will mean greater demand for adviser’s services, not less, as weighing up all the options is not straight forward.

Exploring the options

IFAs have been advising on drawdown for many years, but how does the lifting of GAD restrictions and the option to take a 100 per cent cash lump sum, change retirement advice? Table 1 illustrate a range of options that would be available to a pensioner with a £1m retirement pot – some of which have not been available before.