The most commonly asked questions about pension freedoms

Being prepared to answer some of the most commonly asked questions should help advisers clarify to clients the choices they face when it comes to funding their retirement and reassure them about their financial future, often when it matters most.

Given that no-one knows how long they are going to live into retirement, it is not surprising that some of the questions advisers face are around how long the pension pot will last.

Neil Adams, pensions and investments expert at Drewberry, says: “The foremost question clients ask now drawdown is more widely available is ‘When will my money run out?’

“Unfortunately, not even the best advisers have a crystal ball but it’s possible to provide a rough model of when the money may run out judging by the size of your pot, potential investment returns and how much income you want to draw.”

The most frequent question faced by both advisers and providers is ‘when can I have my money?’. However, the answers may be different from each source.Fiona Tait

While it may seem an impossible question to answer initially, there are plenty of tools available which should mean the adviser can help their client come up with a realistic estimate.

Alistair Cunningham, chartered financial planner at Wingate Financial Planning, suggests: “They’re getting an holistic review, which is cashflow planning led. 

“It becomes, ‘I want £35,000 this year, where do I get it from?’ And the pension may only be part of that for some people. 

“To be fair, not all of our clients have other pots than pensions and some of them are taking smaller incomes from their pension and, in some cases, this is probably a minority, [some] are taking a very high level of income from their pension.”

He says the question he often fields is framed as: “Here’s what I want to do, how do I do it?”

This may be a more common query among clients who are familiar with their financial circumstances, and have a definite idea of their goals for retirement.

For many advisers, their clients will have more simplistic questions to put to them.

Scott Gallacher, chartered financial planner at Rowley Turton, says he is frequently asked by his clients about what they should do, which he notes is largely dependent on individual circumstances.

But some people have questions about specific products, such as annuities.

“Are annuities poor value? As an investment, they probably are but as a guaranteed income for life, i.e. an insurance against living too long, they still have an important place in financial planning,” replies Mr Gallacher.

Another question he is typically faced with is “What level of income can I take?”.

Mr Gallacher answers: “With annuities this will be a figure depending on the pot and the options included, but with drawdown this will depend on the asset mix, attitude to risk and life expectancy.”

Finally, he is commonly asked: “Can I withdraw all my pension?

“For some clients, this can be a good idea but for most the tax consequences make this unwise.”

One of the industry’s biggest concerns as the scale of the changes to pensions became clear, was that people would choose to withdraw their entire pot and spend it on flashy cars, leaving very little to live off should they continue to live for another 20 years.

Clearly, this is less likely to be an issue where financial advice is sought. 

But advisers commonly field questions about the accessibility of the money people have been saving for years and now want to reap the rewards of.

Fiona Tait, technical director at Intelligent Pensions, acknowledges: “The most frequent question faced by both advisers and providers is ‘when can I have my money?’. However, the answers may be different from each source." 

She explains: “A provider or guidance firm will base their reply on their rules and legislation as to whether a client can access their benefits, and an adviser is more likely to base their reply on whether a client should access them. 

“As a result, there can be frustrations where clients believe that the freedoms mean they access their money at any time, much in the same way as they do from their bank account.”

Creating unrealistic expectations

In this way, frequently asked questions have highlighted some of the problems the pension reforms have brought with them and the importance of seeking advice from a professional, rather than taking a ‘do it yourself’ approach.

“The safeguards which have quite rightly been put in place can therefore appear restrictive to people who have already spent the money in their minds and may have unrealistic expectations of how quickly they can do so in practice,” Ms Tait points out. 

“This can, unfortunately, be exacerbated by approaches from scam firms which may promise immediate access at any age. 

The taxation of pension payments is the cause of many questions, as well as a great deal of confusion and frustration.Gareth James

“Advised clients are more likely to have an ongoing financial plan which manages their expectations and which includes a conversation about not just when they can take their money, but how fast and for how long.”

Tax is a mystifying area of financial planning and the complexity surrounding tax when it comes to retirement is proving a challenge for many clients.

“The taxation of pension payments is the cause of many questions, as well as a great deal of confusion and frustration,” confirms Gareth James, head of technical resources at AJ Bell.

“The requirement to tax on a Month 1 Emergency Code basis when the pension freedoms are first used has led to hundreds of thousands of people being taxed more than they had been expecting.”

Mr James notes: “The government did put in place mechanisms to allow the excess tax to be reclaimed, but this takes time.” 

He cautions: “If people are taking out sums on the basis of an immediate need, after tax, of a certain amount then they’re having to withdraw a larger gross amount to achieve this. 

“Forcing people to take more out of their pensions than they want, just because the system forces individuals to be over-taxed at outset, cannot be a good outcome, so we’d like HMRC to look at alternative options.  

“These wouldn’t be new – greater flexibility over taxation has been available for two decades under the older, capped drawdown arrangements.”

eleanor.duncan@ft.com