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Impact of new pension freedom rules

This article is part of
Guide to The Brave New Pensions World

Before the new pension freedoms were announced, Paul Evans, pensions technical manager of Suffolk Life, says the primary concern of the industry was to make annuities work for the majority.

What the changes have highlighted is that annuities are not the best solution for everyone, Mr Evans says.

He says clients should consider initially what they need in the future, how their priorities may change and whether they could use their pension to support anyone else. Only then does Mr Evans say this product solution should be investigated.

The new rules make pensions more versatile, he says. “The relaxed tax position allows clients to plan income withdrawals to suit their own circumstances.”

He adds: “If they want to continue working, they can and dip into their pension in order to supplement regular income. Pensions can be treated as savings accounts, to cover emergencies or to provide for one-off major events, such as a family wedding.

“Pensions will be perceived as more fluid. Contribution and withdrawal can be simultaneous (up to recycling limits).

“Investors can change their beneficiary nominations as they approach age 75, to arrange for funds to be distributed among basic-rate or non-taxpayers, such as grandchildren.”

There will be significantly fewer annuities purchased moving forwards, says David Trenner, technical director of Intelligent Pensions.

Mr Trenner says many people who should buy annuities will not do so because of the words of George Osborne “Let me make it clear, no-one will have to buy an annuity.”

For ‘high net worths’ Mr Trenner says pensions will increasingly be used as part of inheritance tax planning, but for those ‘in the middle’ it will be business as usual: sustainable income throughout retirement.

In terms of the speed of change, the market will change over time as individuals get used to the changes, says David Macmillan, managing director of Aegon.

Initially he says there will be pent-up demand from many of those aged 55 plus who have waited until April to take advantage of the new flexibilities.

Mr Macmillan says in the first few months following April, this could lead to people making rash decisions by cashing in their pensions without understanding the consequences. “They may live to regret acting in haste.”

Overtime, Mr Macmillan says the market will settle down and individuals will be encouraged to think about their retirement choices.

Mr Macmillan says: “More people will look for a variety of solutions, such as cashing in small pots, consolidating others, going into drawdown in earlier years of retirement, perhaps buying a guaranteed income in later years.

“They will combine working longer, but fewer hours with taking some of their pension savings, while continuing to build up further savings through their employer’s pension scheme.

“Retirement will no longer become a drop dead date and individuals will no longer be forced to make decisions at any particular date.

“They will also be thinking about how they can pay for long-term care and leave unused pension funds to their loved ones – both of which lend themselves to income drawdown.