Danny Knight, head of investment directors at Quilter Investors, explains how the right decumulation solution can become a tool for intergenerational planning while also re-inventing the traditional adviser-retiree relationship.
Pension freedoms transformed the opportunity for clients to access previously ‘locked’ pensions and pass on wealth held in their retirement fund. Where they once faced a punitive ‘death tax’, they can now pass on pension wealth tax efficiently. This creates a huge opportunity to hand a valuable income stream to loved ones. Three years on, however, it’s unclear if retirees are making the most of this flexibility by choosing the right investment solution to help defend their inheritance against market shocks and inflation risks.
Taking the wheel
When George Osborne introduced reforms that meant no-one would be forced to buy an annuity, the retirement choices available to clients changed beyond all recognition.
Since then, retirees have been able to access their pension pots from age 55 (or whenever scheme rules allow). The initial fears of retirees blowing their pension pots on fast cars and exotic holidays – leaving them to rely on the generosity of the state – have not yet come to pass. Nonetheless, figures from HMRC show that some Britons are cashing in their pensions. Between the arrival of the pension freedoms in April 2015 and the end of March 2018, some £17.5bn was paid out in flexible pension payments. As this flexibility to access your pension pot is only available to members of defined contribution (DC) or money purchase schemes, it’s little wonder that the Office for National Statistics (ONS) recorded a surge in pension transfers to other schemes of £36.7bn in 2017.
One of the key factors driving this move is the ability to pass on your pension as an inheritance for your loved ones. In a DB scheme, there is no fixed “capital” that can be passed on, although spouses or dependents may still receive a reduced income after your death. Likewise, an annuity may provide spousal benefits but leaves no capital on death.
But within a DC scheme, should the pension holder die before age 75 the beneficiaries can take the pot as income or as a lump sum tax free, subject to lifetime allowance limits. If the death occurs after 75 the income or lump sum is taxed at the beneficiaries’ marginal rate of income tax, not the shrivelling 55% charge that was previously in place.
This ‘death tax’ as it was frequently described had always been sufficient to deter most UK pension savers from making plans to pass on their remaining pension pots. By contrast, today’s pension regime now offers advisers an added opportunity to add value through inheritance and estate planning. So how can an investment solution used in decumulation play a role in meeting retirement income needs, as well as being part of the intergenerational planning process?
Going the distance
These days there are ample opportunities afforded by the new pension freedoms to ensure that the pension pot your client spent their entire adult life accumulating does more than just provide an income