PensionsMay 22 2015

Crib sheet

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Crib sheet

Annuities: The problem with annuities is largely reputational. Rates are currently at all-time lows due to increased longevity and low gilt yields. But research repeatedly suggests what a lot of people want in retirement is a guaranteed income, which can rise with inflation. Annuities are still the best vehicle for delivering this, although they may come into play later on in retirement.

Automatic enrolment: A cultural shift has already started to take hold in workplace savings, as employees get used to having to opt out rather than opt into a pension scheme. By 2018 every worker in the UK should have been enrolled into a pension meaning people should be better equipped to exploit the new freedoms upon reaching retirement.

Blended solutions: While several product types are jockeying for position, a combination of existing solutions is widely tipped to emerge as a widely used tool in retirement planning. Blended solutions will cherry-pick the best aspects of different tools

Buy-to-let: The explosion of buy-to-let mortgages in the past 20 years or so has seen many amateur landlords make a lot of money. Many of the individuals who have seen this are expected to be tempted to follow them when they are suddenly presented with the funds to facilitate a second house purchase at retirement. However, as is often true, by the time the masses are aware of an opportunity, it has passed; buy-to-let is not an easy ‘get rich quick’ scheme and should be approached very cautiously.

Defined benefits: Final salary schemes may be dying out for those entering work, but a huge proportion of those entering retirement will rely on them for all or some of their income and it will be generations before they disappear completely. Freedoms will not apply to the schemes and transfers from them could be contentious.

Enhanced annuities: Impaired life annuities have long been held up as an example of the value annuities can offer, if only those at retirement would shop around. The introsuction of the guidance guarantee could make their use more widespread as retirees realise they could make their pension pot go further, without sacrificing the guarantees.

Equity release: While UK savers have allowed their collective pensions savings to dwindle, property values have boomed. A quarter of UK property wealth belongs to over-60s and it is logical that some of that equity will be released to fund retirement.

Income drawdown: Likely to be the key beneficiary of the new regime, drawdown has always offered more flexibility than annuities, but has always been the preserve of wealthier individuals. The democratisation of the product is welcome, but the masses need to be aware of the risks, most notably the possibility of their retirement pot running out.

Income funds: A range of typically multi-asset funds are positioning themselves as a solution to providing income in retirement. Tailored to a drawdown solution, retirees going into the funds are likely to benefit from ongoing advice. The success of these funds on an individual basis will depend on prevailing market conditions when first taken out. A retiree who invests their pension pot in a bear market could see potential income affected for the rest of their life.

Investment trusts: The AIC (Association of Investment Companies) has been keen to push closed-ended funds as the most suitable existing vehicle to make the most of the freedoms. As companies in their own right, the trusts can pay their own dividends, making them well suited to income. They can also hold back dividends from their own investments to ensure they can continue to pay income in leaner years.

Longevity insurance: Not yet popular in the UK, this form of ‘reverse life insurance’ is designed to pay out a regular income, but only once the policyholder has reached a certain age. Could work well in conjunction with drawdown, to fund the last part of retirement.

UFPLS: The uncrystallised funds pension lump sum is more simple as a concept than as an acronym. The main headline-grabbing detail of the new freedoms is the ability to cash in an uncrystallised pension pot, 25 per cent of which is tax-free. Most commonly associated with those with small pots, this will also be the gateway for retirees looking to use a traditional pension to fund some of the more flexible retirement income options outlined.