State PensionDec 21 2022

‘The state pension will be back under the microscope’

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‘The state pension will be back under the microscope’
Andrew Tully, technical director at Canada Life

“There could be an opportunity for these investors to take gains in these portfolios and invest into Isas and pensions. Where these contributions have already been maximised, investment bonds provide a real investment opportunity without limiting the investment options.”

Tully explained that using an investment bond wrapper could enhance tax efficiency of the money as it is a non-income producing asset.

“Those clients who are yet to use their CGT exemptions for this tax year have until April to take advantage before the changes come in. Where appropriate the spousal exemption for CGT could be used to equalise the assets before selling which means both CGT exemptions could be fully used.”

Looking back

Reflecting on the past year, Tully described it as “a tumultuous year for markets and investments”, much of which would not have been anticipated by clients. 

“One area of positive news is the increase in annuity rates which the rising gilt yields have driven", he said. 

“Rates have increased by more than 50 per cent this year, meaning rates are at their highest since 2011. This massive jump brings the benefit of guaranteed income back into focus for many retirees.”

Tully explained that drawdown has huge benefits for many people given the flexibility it offers but using an annuity as part of a retirement strategy alongside drawdown, or gradually phasing into annuity as a retiree gets older, is looking increasingly attractive.

However, he said using all an individual’s pension savings to buy an annuity on one day may be an “unwise strategy”.

“Phasing annuity purchase as the client gets older removes the risk of locking into one rate when prices are changing,” he said.

“And clients can potentially benefit from increased rates due to ageing and deteriorating health. Used in tandem with drawdown the client can maintain investment exposure to hedge against inflation. 

“And if the annuity is held within a drawdown wrapper, the client has the flexibility to vary the income they take, as well as the ability to pass on benefits tax efficiently following their death.”

Elsewhere, Tully explained that the cost-of-living crisis saw withdrawals from pensions for April to June 2022 at £3.57bn, a 23 per cent increase from the same quarter in 2021. 

“It is completely understandable people are dipping into their pensions to make ends meet and prioritising heating and eating above their savings at this difficult time,” he said.

“However, it is important that the government, regulators and industry help people make the best decisions. Dripping funds out gradually rather than all at once can save tax.