Retirement reforms force rethink of pension investment strategies

Roundup of comments from the experts on the radical changes planned to Pensions announced in this week’s Budget.

Dan Hyde
Deputy Personal Finance Editor, Daily Telegraph
Extract from Daily Telegraph 20 March 2014

From April 2015, savers will be given total freedom over how they withdraw pension money. In the meantime, temporary measures will be put in place to ease the strain on those seeking a retirement income.

From March 27, the Government will introduce arrangements to give savers greater access to their pensions. Savers whose total pension savings amount to £30,000 – rather than £18,000 – will be able to take the entirety as cash. This will be taxed at marginal rates.

Savers with larger amounts in pension savings will be able to take up to three pensions worth £10,000 each as cash, rather than two worth £2,000. Savers who use “income drawdown” will be allowed to take larger sums as income. This is likely to be several thousand pounds extra a year from each £100,000 in savings.

An individual will need just £12,000 of secured pension income from other sources to make unlimited withdrawals through “flexible drawdown”.

Stephen Barter
Chairman of Real Estate Advisory Practice, KPMG

Unlocking pensions will enable more parents to lend a helping hand to their children as they look to buy their first home. The trend of giving the next generation, who are struggling with the affordability of housing, a leg up is already established: Shelter’s research shows that parents already lend and gift £2bn each year to help their children get on the property ladder.

It could also fuel the buy to let market, with people liberating their nest egg to invest in property and benefit from the rental income this would bring to them throughout their retirement.

Those who use some of their pension pot in this way clearly need to be mindful of the tax consequences for them, and satisfied that this is a sensible use of their savings. But it will undoubtedly offer much-needed support, though adding further fuel to demand and price pressure at the more affordable end of the housing market. Original release

Tony Clare
Pensions Advisory Partner, Deloitte

The Chancellor’s radical changes to pensions means that the default investment strategies of defined contribution pension schemes may no longer be suitable for schemes’ members. About 90% of members of defined contribution pension schemes do not move from default investment strategies, which automatically switch investors’ funds from equities to lower-risk cash and bonds as they approach retirement. The aim is to protect investors’ funds values before they are forced to buy an annuity.

Now that savers are no longer forced to buy an annuity, pension scheme trustees will have to review whether these remain suitable for scheme members, particularly if savers decide to use income drawdown to generate a retirement income or indeed draw the full fund as cash at retirement. Scrapping the annuity rules is likely to lead to a huge growth in income drawdown, which we calculate could increase retirement income by about 15%. Original release

Peter Spencer
Chief Economic Adviser to Ernst & Young – EY ITEM Club

Changes to pensions are ‘radical’.  At least this left the Chancellor time to talk about more far-reaching reforms. The changes to defined contribution pension drawdown arrangements are certainly radical and although they are likely to increase drawdowns (and conveniently increase tax receipts) in the short-term, they could increase pension savings and indeed the overall household saving rate by making this form of investment more attractive.

The idea of saving in order to purchase a retirement annuity was looking progressively less attractive as annuity rates reached rock bottom and recent inflows into personal pensions and AVCs have been disappointing. Original release

Philip Smith
Director Defined Contribution Pensions Team
Price Waterhouse Coopers

According to PwC calculation the Government’s promise of allocating £20m to help deliver free and impartial face-to-face guidance for people with defined contribution (DC) pensions at retirement could cost as high as £120m a year.

Approximately 400,000 people will need access to free guidance this year as they decide what to do with their defined contribution pensions pot, now the system has much more flexibility and choice. This equates to a minimum requirement of 400,000 extra hours of guidance this year. This could lead to a need for an additional 500 suitably qualified people to deliver this advice, risking demand outstripping supply.

Philip Smith: The free face-to-face guidance guarantee at retirement needs to be paid by someone, but questions remain over who will shoulder this substantial burden. Insurance companies could be facing a double hit from the Government’s proposals as they shoulder the duty of delivering this guidance at the same time they are contemplating how to fill the likely contraction of their annuities business. The most likely outcome is that pension scheme members will ultimately end up paying for the free advice indirectly, as providers pass on some or all of the costs in member charges.

The Government also needs to set out a plan on how they will address the potential guidance gap, as the immediate need for suitably qualified people at the providers will be difficult to fill. Managing a retirement fund on an ongoing basis involves considerable risks. To get real value from these changes people will need to understand that guidance is not just a one-time event. Help is likely to be needed several times across what might be a 30 year retirement. Original release

Paul Lewis, Saga

From April 2015 people will be free to use their pension fund as they like however small or big it is. You will still be free to draw up to 25% of it tax-free. And the advice to almost everyone will be to do that first. The rest can be drawn down as an income, or taken in full as a lump-sum. Anything taken out of that remaining pot will be taxed as income.

If you want to buy an annuity to give you a guaranteed income for life you can. And for some that might be a good idea. But most will probably want to keep it invested, use the income, and draw from the capital as they need it. With freedom comes responsibility.

At age 65 you will probably have 20 to 30 years to live. So it is important not to spend it all at once. But for the first time it will be your decision. The state will not interfere. All pension schemes will have to give free face-to-face guidance to new pensioners with a pension pot. It is not quite clear how that will work but 320,000 new pensioners every year will have that right from April 2015.

The new rules will need new laws and so won’t happen until April next year. But meanwhile, from next Thursday March 27, the Chancellor will relax all the current restrictions making it easier to cash in smaller pension pots and draw a bigger income from others. Original release

Barry O’Dwyer
Workplace Managing Director, Standard Life

The group is very happy with the reforms, despite the inevitable impact they will have on sales of annuities, through which people buy a guaranteed income for life with their pension savings.
Comprehensive blog release by Julie Hutchison Head of Customer Affairs

Mike Sandiford
Head of Partnerships
0207 193 9931

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