Future pensions innovations – it’s retirement income, but not as we know it

As highlighted in my previous blog, there has been a lot of comment regarding potential product innovation in the field of pensions and those savers reaching retirement.

 

What is clear is that while annuities are far from dead and buried, it is very unlikely that the traditional “one size fits all” annuity will be as prevalent, as the majority of people are likely to want their pension income to be able to adapt to their individual circumstance, health and their changing lifestyle in retirement. For example, it has been suggested that annuities could be designed to offer smaller payments initially while other sources of income continue and then increase later in life as Care is required. Similarly, many are considering the design of an annuity that could provide a higher level of income initially to suit additional costs of, say, holidays, family, homes, entertainment etc., and decrease later in life when one tends to stay at home, possibly increasing again when Care is required.

 

Along a similar vein, there could be certain annuity products that are specifically designed to consider payments for Care costs, which could address the coming social issue for which Government and individuals are not fully prepared.

 

A concept inspired by US pensioners is a pension income product you might purchase at retirement that doesn’t provide any income for, say 20 or 25 years, at which point the payments can be significantly accelerated. This could make both the early and later stages of retirement planning easier. A product like this could work extremely well with pension drawdown, which will still be available and work well for many when they reach retirement.

 

So, there are likely to be some very exciting changes in the world of retirement income options over the coming years. There remains the question of the cost of these solutions, especially in the formative years of these innovations when there is likely to be less competition. What is clear is that savers are likely to only benefit from the opportunities they bring if they take structured and impartial financial advice, and take the time with their financial planner to put the right solution in to place.

Duncan Wilson

Private Client Partner

Telephone: +44 (0)20 7893 3456

Email:  getintouch [@] broadstoneltd.co.uk

A rethink on ‘face to face guarantee’ for pensions advice

There has been a lot of news and comment in relation to pensions in the last few days. Yesterday, the Government published a response on the “Freedom and Choice in Pensions” consultation.

 

Not only has the Government put more detail into their plans on how they intend to deliver the “free and impartial” advice to those people at retirement looking to draw their pensions, there has also been comment regarding some of the potential product innovations that we could see in the coming years.

 

Turning first to the “free and impartial” advice.  It is now clear that the Government is not going to look to the big insurers (with the biggest pockets) to fund the advice.  Whilst this might have been an obvious route for them, there were questions about the “impartiality” of those looking to sell products, who would therefore have a vested interest, advising those looking to retire and needing assistance with their choices.  With this in mind, it looks as though the financial planning advice will be driven through the Money Advice Service and The Pensions Advice Service who will direct pension savers to “retirement guides”.  This approach seems to be sensible and pragmatic.  However, it is clear that there has been a rethink of the guarantee of free “face to face” advice.

 

At the current time the detail on the guidance that will be received and what savers should expect from their guidance provider is still unclear.  However, the complex decisions that need to be made at retirement along with the expanding horizon of products and choices that are likely to be available, we would expect that a large majority of pension savers will still be recommended to seek face to face advice.

 

Duncan Wilson

Private Client Partner

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

Would you turn down free money from auto enrolment?

With the new changes to pensions there is even less reason to opt out of a workplace pension. It has always been the case that an employer pension contribution is free money but what stopped people taking it up was the fact that people were limited to how and when they could draw that money back.

Not so now. Benefits will be able to be drawn from 55 from 2016, in full, so no need for people with a small fund to sign up to a potentially expensive and inflexible annuity. The combination of tax relief up front, a top up from the employer and much more flexibility on when you can draw out is hard to beat.

A classic example is people close to retirement. So many ask me whether it's worth joining an auto enrolment scheme for such a short time. The answer is most definitely yes! Even before the new rules are implemented in full it is possible to build up a pot of up to £10,000 which can then all be drawn as a lump sum (25% is tax free and the balance taxed as income). No brainer!

 

Nick Rudd

Corporate Benefits Director

 

Telephone: +44 (0)20 7893 3456

Email:  contactus [@] 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

What will you do with your pension pot?

From 2015, individuals will be broadly be able to do what they like with their pension pot. Some commentators have suggested that, having saved all our money for retirement, we will get to a point where the sight of this money and its availability will go to our heads and we will all be booking one way trips to Vegas and heading for the Ferrari garage.

This is, of course, utter nonsense - the majority of human adults seem to have evolved an ability to take care of themselves over the millennia.

This is not to ignore the fact that certain individuals will fritter away what they have managed to save. They could become reliant on the state, for example being entitled to the state pension and other benefits, as they would be now. However, the reality is that most people get up in the morning, try hard at their job and do their best to take care of themselves and their families. That's not suddenly going to change.

There are though other disadvantages around the changes to pensions. They could well make annuities more expensive as their take up will be reduced.  In my opinion, this is a necessary cost to give people the confidence to invest more for the longer term, knowing that their retirement savings have now become a lot simpler and a great deal more flexible.

Matthew Phillips

Managing Director

Telephone: +44 (0)20 7893 3456

Email: getintouch [@] broadstoneltd.co.uk

Are auto enrolment contributions alone enough for retirement?

Following on from Rob’s last post on why we’re all being automatically enrolled, I thought it would be a good time to tackle whether these auto enrolment contributions alone are going to be enough for retirement?

In short, it’s unlikely.

Now the contributions are being phased in. Using the default earnings basis the contributions will start at 1% for the employee and a minimum 1% for the employer, from October 2017 this will rise to 3% for the employee and a minimum 2% for the employer, and finally from October 2018 it will be a 5% employee contribution with a minimum of 3% from the employer. So from October 2018 it will stabilise at a total of the equivalent of 8% of your salary being paid into your pension.

But what does that mean in terms of what you receive when you retire?

Well to put it into context, Scottish Widows 2013 UK Pensions Report says that “the average British worker anticipates stopping work around age 66 and is looking for retirement income of £25,000 a year. That would require savings of £1,000 a month from age 30.”

On an equivalent salary of £25,000 a year now, that would be a contribution of 48%. For many receiving only the minimum employer contribution of 3% at 2018, that means they will need to find a contribution of 45% from their own salary!

To be fair, many people are looking to live on around half their salary at retirement, but that still means on a salary of £50,000, you would need to contribute 21% of your salary from 30, receiving 3% from the employer.

Now you may not want to retire by 66, or need an annual pension of £25,000, you may need more, you may need less. The message is that you should take this as an opportunity to think where you’d like to be at retirement, and whether or not the auto enrolment contributions alone will ensure you have the kind of retirement you can look forward to.

Charles Goodman

Consultant

Telephone: +44 (0)20 7893 3972

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

 

Will your tax diversification be in the right shape when you retire?

No, this isn’t another Blog about pensions - this Blog is about tax risk.

Over the last 35 years Income Tax has fallen from a breath-taking 98% (1978/79) to 45% and Capital Gains Tax has bounced from 30% up to 40% and down to 28%.

As a result, tax risk is a serious consideration in your retirement planning strategy especially when you need to retain as much of your net wealth as possible.

In managing tax risk, diversification across the various tax regimes is as important as diversification across the various investment sectors and asset classes.

With ISA Millionaires becoming more prevalent those who took full advantage of their annual allowances are laughing all the way to the bank. Likewise, those with investment strategies that take full advantage of the annual capital gains tax allowance are rubbing their hands with glee.

Tax exemption, Tax deferment and Tax relief are a starting point in all financial planning scenarios.

Transferring assets to your spouse/partner or assigning investments to beneficiaries can reduce, or defer, the ultimate tax point further; whilst sheltering your capital from inheritance tax (without giving it away) not only reduces your inheritance tax risk but allows your family to retain 100% of your tax-sheltered assets.

If you have ‘planned for life’ without ‘life-planning’ what gaps might you have in your tax risk?

At BROADSTONE we specialise in Life Planning – why not give us a call.


Helen Wilson
Consultant

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