Our poll of trustees and sponsoring employers on the changes from the Budget

We recently ran a high level breakfast seminar to discuss the pensions revolution kick-started by George Osborne in March.

During the sessions we surveyed the attendees to gauge their views on some of the pertinent issues.

Our poll found that:

100% support the government’s decision to expand pension flexibility.

This is perhaps no surprise. Increased freedom and choice is nearly always universally welcomed, despite the short period of flux that we have to go through to get there.

68% expect defined benefit (DB) members to be tempted to take their transfer value and convert to defined contribution (DC) to access flexibilities.

This is surprisingly high and only time will tell if this view is borne out. If the government decides to ban transfers from DB to DC from April 2015 (and we have received strong indications from HM Treasury that if they do bring in a ban it will be from that date) this could create a “buy it now while stocks last” style firesale. However, if the government does not ban the transfers it will be interesting to see the steady state numbers. It is hard to think that many members will transfer as they will risk losing the guaranteed income, which surely remains very valuable.

90% of attendees think that individuals will act prudently in retirement.

This has certainly changed from my early conversations with employers who were very worried that their members could make more decisions in retirement. It is here that the guidance guarantee will be crucial in ensuring members consider their own needs and don’t underestimate their longevity – otherwise there could be a lengthy wait for a Lamborghini (or Aston Martin...).

73% expect annuities to remain a key part of retirement planning.

This certainly echoes our view that the need for a guaranteed income during retirement will be highly valued by individuals. There is no doubt that the frequency or size of annuity purchases will decrease and it is likely that many individuals will use some of their DC savings to purchase an annuity at some point.

14% support a government ban on transfer from defined benefit to defined contribution.

This is interesting as restricting freedom to just DC only members seems to go against the government’s ideology and is perhaps driven by the fear of the impact on the economy by the possible exodus from long-dated gilts.

What should employers and trustees be doing?

The wide-ranging changes in the budget mean that trustees and sponsoring employers need to move from ‘wait and see’ to taking action. Top of their list should be the need to review their default investment strategies to ensure that they remain relevant for the majority of their members. This is especially so when typically the vast majority of the members make use of default strategies.

Sponsoring employers should also review the benefit structures in their DB schemes to ensure they remain fit for purpose in the changing world. Members use of trivial commutation and additional voluntary contributions are going to change with the Budget’s changes to the way members will structure their retirement income. By reviewing the schemes’ benefits employers could realise long-term cost savings as members have access to the fullest range of options as possible. In many cases rules will need to be changed and this work should begin sooner rather than later.

David Brooks
Technical Consultant

Telephone: +44 (0)20 7893 3456

Email:  contactus [@] broadstoneltd.co.uk

Budget 2014: Trivial Pension Pots – an inappropriate use of words?

Whilst everyone is digesting the impact of the Budget announcements, there is little doubt the overall relaxation and potential reduction in the ‘tax take’, from our pension funds, has been well received.

Sadly, the use of the word ‘trivial’ with regard to smaller pension funds is at best inappropriate and at worst unavoidable due to our modern working practice and a more transient population. No matter how small a pension pot it is important to acknowledge that its owner has worked hard to build up these funds and certainly deserves better recognition for their efforts than – ‘trivial’.

That said, these same individuals have potentially been handed one of the most favourable retirement planning strategies in the Budget.

The ability to withdraw 100% of a fund, below £10,000, as a lump sum (up to three times in their lifetime) with 25% of the fund being tax free and the remainder being taxed at their marginal rate increases an individual’s overall retirement flexibility - especially as there will be no requirement to purchase an annuity.

Amassing several small pension funds, over a lifetime, is currently the norm and not the exception. But with auto enrolment gathering momentum the likelihood for everyone to have several small funds in the future highlights that retirement planning will become more important and possibly more complex in future.

For some withdrawing 100% of their pension funds, as cash, may be wholly appropriate; whilst for others the decision may not be as clear cut.

Whichever side of the fence you sit on in the current retirement planning debate and no matter the size of your pension fund there has never been greater need for independent financial advice than at present.

 

Helen Wilson

Consultant

Telephone:  +44 (0)20 7893 3456

Email:  getintouch[@]broadstoneltd.co.uk

 

 

Budget 2014: Thinking about retiring? Where to get advice.

One of the key areas that the Chancellor announced was the Government’s wish that everybody should get impartial advice when retiring.  As someone who has now long worked in and argued for a professional, independent financial planning sector, this was music to my ears.  However, there is now a huge gap in who is going to provide this advice, how it’s going to be provided and what is going to be provided.  Where should prospective retirees get advice now?

I have to declare a bias. I am the managing director of the country’s largest independent fee based financial planners.  I will obviously be saying that clients should seek the advice from a fee based adviser.  As a professional, clients should seek the help of highly qualified individuals who will for a defined and clear fee give them advice as to what to do next and help them through the next steps.  Obviously, professional advice provided by people who have spent many years studying for qualifications and gaining experience does cost money.  Whilst many clients are only too happy to pay for the value of the advice and peace of mind that they get, we need to be clear that in certain circumstances the cost of independent advice becomes marginal or even detrimental where clients have less money.  What can these people do?  To an extent the sources of advice now have become limited. 

The Government has launched and heavily marketed the Money Advice Service.  The MAS is to an extent a misnomer.  Legally you can’t provide advice in the UK on financial planning without being regulated by the Financial Conduct Authority.  The website gives useful information and but is essentially an information portal.  It tells you what you could do as opposed to what you should do.

Many of the high street banks have now stopped providing financial advice, and when they do they will normally be restricted.  This means that they can only provide advice in certain areas and for them this will be limited to the products that the bank provides.  As most banks do not provide pension provision or advice heading here may mean that the retirees get some cheap advice but expect it to be limited.  Individuals working in any regulated business have to comply with FCA’s 11 principles of business conduct, which includes dealing with clients with integrity and due skill and care.  Whilst many individuals in the banking world do and have always adhered to these principles it is stating the obvious that up to now the culture in many banks has led to mis-selling and a general lack of trust that these institutions are now having to address.

There are some online services but nothing that at the moment has got any traction and this is still very much in its infancy. 

Finally, the insurance companies may well provide you with generic advice but this again will either be limited or information.

As you can see there are only a limited number of places that retirees can go to.  The advice gap does exist and so it will be interesting to see how the Government intends to bridge this gap to provide advice to retirees in 2015.

Matthew Phillips

Managing Director

Telephone: +44 (0)20 7893 3456

Email: getintouch[@]broadstoneltd.co.uk

Budget 2014: Getting Advice

It seems likely the retirement advice market will evolve into a two stage process.

Retirees will first need to learn about their options and the implications of those options. This will be the ‘guaranteed guidance’ much heralded by the Government. There are hundreds of thousands of people retiring each year and the Government wants each to have a face to face meeting so it is unclear how this will be delivered. But it will be free and impartial so prospective retirees should first take advantage of this offer when it is available. This should allow retirees to understand and perhaps come to a conclusion on the best option for them.

If their chosen option is more than hiking all the money out of their pension as soon as they can they may well need further advice on how to set up the Drawdown or which annuity to buy, what investments to hold and other such matters. This more specific advice is likely to be still carried by the qualified IFA community at a cost to the retiree. There is a danger that the first phase will encourage some to go it alone and no doubt some will make expensive mistakes.

It will be interesting to see how the FCA reconciles their current view of drawdown as a ‘high risk product’ with any new advice process.

Simon Nicol

Pension Director

Telephone: +44 (0)20 7893 3456

Email: contactus[@]broadstoneltd.co.uk

Why this pension consultant is now making an extra pension contribution

The proposed new freedoms in the Budget to withdraw unlimited funds from pensions is a game changer for many, but particularly those like me nearing retirement. It is the opportunity to defer income for a few years avoiding 42% tax and NI and take the fund out when needed as income at an effective rate of 15%. Not a bad return.

By way of example, £10,000 of income can be taken as income resulting in an immediate net payment of £5,800 (after 40% tax and NI). Or this could be used as a pension contribution avoiding all immediate tax charges. When employment income has ceased it should not be too difficult to arrange matters such that this fund is drawn during a year when basic rate tax only is paid. Then the £10,000 is paid £2,500 tax free, £7,500 taxable at 20%, net result £8,500. A 46% return! Any growth on the funds in the tax free environment of the pension only adds to the benefit.

With the big increase in ISA allowances allowing couples to invest £30,000 a year, canny investors will be able to top up existing ISAs to generate substantial tax free income, and many couples will be able to keep the taxable element of their joint incomes income permanently in the basic rate tax band.

Pensions have been the subject of much criticism and for many lost their appeal. The new rules will make them once again very attractive tax planning vehicles and I for one will be taking full advantage whilst it lasts.

 

Simon Nicol

Pension Director

 

Telephone: +44 (0)20 7 893 3456

Email: contactus [@] broadstoneltd.co.uk

 

 

 

BROADSTONE’s Matthew Phillips’ reaction to the Budget 2014

Actually two major announcements for everyone to be aware of, and really important from a financial planning point of view.

Firstly, the ISA has (finally) been made simple and more relevant.  Rather than worrying about whether you go to a cash ISA or a stocks and shares and becoming confused about the different levels, this has been done away with so that you can either hold cash, or investment in the same account.  This will make it simpler, more straight forward and encourage people to save and not be put off by perceived complexity.  The additional increase to a nice round allowance of £15,000 means that a couple can now shelter up to £30,000 of savings and investments each year and not pay tax.  Again this is really welcome news and as I will point out later makes our savings system much more straight forward.

Secondly, the changes to Defined Contribution Pensions.  This is a really significant change.  Most people now through auto enrolment will be being placed into a defined contribution pension scheme.  The Chancellor has announced that these will become much more flexible.  You will not have to purchase an annuity, you will be able to draw out income when you want and to the amount you want.  

This means that short and medium term savings could be carried out through ISAs and long term retirement saving into what is beginning to look like a “big ISA with tax breaks”, your defined contribution scheme. This is a much simpler set of affairs for everyone going forward and actually runs the risk of looking joined up.

Over the longer term, I suspect (and hope) that this simplification will lead to greater pension take up, now that some of the perceived inflexibility has been done away with. And while I welcome the simplicity, people will still need to have a comprehensive financial plan because this additional flexibility means that the need to take advice is greater.

Matthew Phillips

Managing Director

Telephone: +44 (0)20 7893 3456
Email: getintouch [@] broadstoneltd.co.uk