Retirement freedom is more than just a question of one pot of cash. Securing income for retirement is no longer simply a sales process for a limited set of products.
The changes should bring an age of proper, holistic retirement planning, and that will mean considering a wider range of assets and income sources before making a decision about retirement income.
The amount that has been saved into a money purchase pension is a key part of the planning process, but clients are no longer constrained to taking income through an annuity or drawdown. This brings useful flexibility, although defined contribution pensions do not exist in isolation.
Before even considering accessing any private funds, it is worth pondering the state pension entitlement of the individual. A flat rate state pension, worth around £150 a week, will come into effect from April 2016 for men born after 1951 and women born after 1953 who have
at least 10 years’ national insurance contributions.
Defined benefit pension
Another source of secure income in retirement could be a defined benefit pension – once referred to as ‘final salary’, although increasingly payouts are based on ‘average salary’. Such schemes are dying out fast – none of the FTSE 100 companies still offer one – but according to Prudential around half of those retiring this year have some value in a salary-based scheme.
Outside the world of pensions, property is a key source of wealth and therefore income. Over-60s own about a quarter of all the UK’s housing wealth, totalling around £1tn, according to LV=. Downsizing would provide a lump sum to invest or spend, or homeowners could release equity from their property without the need to sell up and move out.
Finally, there is the variety of other savings or investments that an individual seeking advice is likely to have amassed, including Isas, fund portfolios or plain vanilla savings accounts.
For savings accounts in particular, income could be largely tax-free since this year’s Budget brought in a new savings income allowance of £1,000 a year for basic-rate taxpayers.
How – and more importantly when – various sources of income are accessed will define at what point and in what way pension access is utilised. Two examples highlight options at either end of the spectrum.
The first is one cited by government older workers advocate and new pensions minister Ros Altmann and relates to the removal of death charges for passed on pension funds. She, and others, argue that the changes make a pension extremely attractive as a way to pass down wealth and to provide for the future needs of squeezed younger generations.
As such, individuals should think about draining every source of wealth they have to provide an income, leaving the DC pension until last – and hopefully not touching it at all.
Of course, tapping a property, which would otherwise have been passed on in order to transfer wealth wrapped into a pension, may feel like robbing Peter to pay Paul.