Last year was quite a roller coaster for pension planners – mainly thanks to the government’s announcement of pension reforms. The imminent death of the annuity industry was foretold, financial planning businesses saw their share price soar while life insurers plummeted, and we all spent a considerable amount of time speculating as to what the longer term impact might be. With just a few months until the new rules come into force, let us look back at these and other major events of 2014.
The annuity is dead – long live the pension
The stock markets had no doubt as to the impact of the government’s programme of pension reforms. Within a few days of the announcement of the reforms in the chancellor’s Budget in March, life insurers such as Legal & General saw their share price fall by 12 per cent while IFAs such as Hargreaves Lansdown rose 15 per cent. With no requirement left to buy an annuity and restrictions or disincentives on drawdown and cash lump sums largely removed, a new world of retirement planning was quickly envisaged. Clients would be able to take larger lump sums and invest outside of the pension environment – using Isas, property and structured products – or take advantage of a much more flexible drawdown regime to take higher incomes than were previously allowed under the Gad limits. The net result? More need for personal financial planning, less demand for annuities.
The new landscape is equally attractive for high net-worth individuals as it is for those with more modest ambitions. Wealthier pensioners have more freedom to invest, allowing them new lifestyle choices. Lower income pensioners can take a significant lump sum instead of a pittance in annuity pension – offering them new lifestyle choices too. At the lower end of the spectrum the state could lose out if retirement pots are exhausted too quickly. But despite this obvious concern, the reforms have been met with widespread approval – so much so that it is difficult to envisage a government eyeing its popularity rating ahead of an election not following through with the proposals as promised.
Rumours were spreading among the defined benefit pension community last year of a higher volume than usual of transfer enquiries being made by members. It should not be a surprise that final salary scheme members want to benefit from the freedoms now available to other pensioners, but they can only get them by transferring out.
Transfers are normally good for DB schemes as the cash transfer value is less than the actuarial cost of the benefits. So trustees will be minded to grant them where possible – and that will lead to a bumper case load for IFAs specialising in pension transfer advice. Many noted an uptick in queries over the winter, although it will not be until after April that these translate into action. In order to facilitate this it was announced that the onerous qualification requirements to allow IFAs to advise on transfers would be relaxed; although this has not been clarified.
And what is not clear is whether a recommendation to transfer is always necessary for a client to proceed – or whether evidence that advice has been taken (whatever that advice concluded) is sufficient to satisfy the new rules governing this process. Many pension administrators currently refuse to accept transfers without an IFA recommendation. But the new rules do give transfer advisers more scope so that, taking all a client’s circumstances into account, positive recommendations are by no means out of the question. But either way, the new rules announced in 2014 were expected to keep IFAs busy for the next few years.