Over 55s likely to shun guidance on retirement options and go it alone

• 41% unaware of retirement income options available

• 36% do not know what an IFA is

• 33% would not value financial advice when retiring

Retirees may not take up the offer of guidance announced in the Budget, according to MGM Advantage, as research¹ reveals that the over 55s do not value expert advice and believe they can manage their financial affairs by themselves. The retirement income specialist is warning that, in the customer’s best interests, the guidance guarantee process will need to be clearly signposted and consideration given to some form of compulsion to ensure good customer outcomes.

The guidance guarantee is a crucial piece of the Budget jigsaw. Just as your choices at retirement increase, so those decisions become more complex. Given the need for proper financial advice is even more important after the Budget proposals, it is extremely concerning that so many people do not value it and believe they are able to make decisions about how to best finance their retirement by themselves. If people do not seek expert help when considering their options for retirement, we could see many people making poor choices, such as paying too much tax, or investing in poor value solutions.

We need to think about the lessons learnt from auto-enrolment, as there we have a form of soft compulsion to save. Perhaps similar prompts to use the guidance service should be considered, to ensure most people have a basic level of understanding of the myriad of options which are likely to become available before making any decisions.

Research in detail

One in three (33%) UK adults aged 55+ and not yet retired say they would not value financial advice when retiring at all, with this rising to 38% of those with household incomes under £30k. Almost two in five (38%) of all UK adults aged 55+ have never sought advice about retirement finance options. Of these, just under a third (31%) say they are confident enough to plan their own affairs, while one in ten (12%) say they don’t want to talk to anyone else because their financial affairs are private. Those with household incomes under £30k are much less likely to seek advice than their richer counterparts, with almost half (45%) trusting their own judgement compared to just a quarter (25%) of those with incomes of £30k or more.

In addition, two fifths of those aged 55+ (41%) say they are not aware of the different products and options available to them to generate retirement income, with this rising to 45% of those with household incomes of under £30k, and almost half (48%) of women.

The research also reveals that almost half of those aged 55+ (44%) believe they do not need an independent financial adviser (IFA), while more than a third (36%) do not know what one is. Men are more likely than women to believe they don’t need an IFA (47% compared to 42%) while women are more likely to be unsure what an IFA is (41% compared to 31% of men).

When asked which sources they have used for advice about retirement finance options, a fifth of respondents (20%) said internet websites, while over a sixth (18%) trusted their pension provider and the same proportion have consulted their family. A quarter (25%) said they had used an IFA. Men are more likely than women to use the internet (24% compared to 17%) while women are more likely to ask family (22% compared to 13% for men).

1. Source: MGM Advantage research among 2,060 UK adults aged 55+, conducted online by Research Plus Ltd, fieldwork 4-11 October 2013.

Key Changes – Budget 2014

By Andrew Tully – MGM Advantage

 
George Osborne’s revolutionary budget introduced unprecedented freedom over how and when people take their retirement savings.  The following table outlines the likely legislative timetable to get the changes introduced.

	Immediate changes	April 2015 full flexibility
March 2014	Budget announcements 19 March. Finance Bill published 27 March	Budget announcements 19 March Consultation runs for 12 weeks
June		Consultation closes 11 June
July	Finance Act 2014 gets royal assent. Most changes backdated to 27 March 2014	Government issues response to consultation giving policy objectives by 22 July
Aug/Sept		Draft legislation published
October		Necessary Bills to implement change introduced into Parliament
January 2015	Pensioner Bonds to be introduced 1 January
Jan/Feb		Legislation gets royal assent (Fin Bill completed by year end if possible). Pens Bill may be slightly later
April		Legislation effective from 6/4/15

There are a couple of key dependencies within this table. The first is 22 July, when the Government has said it will issue its response to the consultation. As this is a policy paper it needs to be issued when Parliament is sitting. Parliament closes for summer recess on 22 July, and this year due to party conferences and the Scottish Independence referendum the recess is longer than normal. If that milestone is missed, the process becomes exceptionally tight.

There are likely to be two Bills – a Finance Bill with most changes, and a Pensions Bill which is needed for changes such as defined benefit transfers. Finance Bills don’t go to the House of Lords (HofL) so proceed through Parliament quicker, the Pensions Bill would go to HofL so would take longer.

And in 2015 we have a legislative backstop as a General Election will take place on 7 May 2015, which means Parliament is dissolved on 30 March 2015. There is also the possibility of ‘electioneering’ impacting on any legislation going through Parliament in the last few months before an election, particularly as the Coalition Government starts to diverge.

Despite the great flexibility which is being introduced, many people will need and want some certainty. That means products delivering guarantees and longevity insurance – annuities, or whatever they may be called after April 2015 – will remain, for the majority, the most secure option of guaranteeing a lifelong income.

People will still need a retirement income and advisers will play a key role helping people to make responsible decisions on how to secure that retirement income. In the coming weeks we'll release four further chapters which we hope will guide you through the next year:

·         What will people do in the run up to April 2015?

·         Risk: future of annuity rates

·         What will the retirement world look like after April 2015?

·         What the market may look like after April 2015?

What does it all mean?
While people will have much more flexibility from April 2015, many people will want at least some level of secure income for life – a hedge against living too long. Many retirees are naturally conservative so while increased flexibility may have some appeal, they will also want to make sure they have long-term guaranteed income.

People will need tax planning as to how and when to take their benefits. While taking it all in one go may sound appealing on an emotional level, this means they are likely to pay more tax than taking it gradually, as and when needed. People don’t like paying tax and so they will want to phase income over a longer period.

What has changed?
Investors will have increased flexibility to meet short and long-term needs like never before. And on an emotional level, clients may have a kneejerk reaction which drives them towards taking a lump sum from their pension. Advisers will hopefully help people move away from this immediate emotional response towards working out the best strategy for taking a retirement income.

Many people with smaller funds will be attracted to cash - rather than buying an annuity - and many investors will be attracted to drawdown.

There are a couple of key risks at opposite ends of the spectrum:
Some investors will spend too quickly and face a fall in their standard of living later in retirement
Some investors will believe putting money in their bank account, or other conservative investments, is better than leaving it in their pension. This may mean they are ‘excessively conservative’ withdrawing less income than is sustainable, as they fear seeing their savings reduce in value.

Annuities help with both of these risks, allowing people to draw the highest level of sustainable income, and in the case of the Flexible Income Annuity tipping that balance so, for example, allowing a higher income to be withdrawn in the early years. While also giving certainty that an income will always be paid, no matter how long the individual lives.

With this increased flexibility and choice there is a need for more specialist advice. Access to advice and guidance will be key.

What hasn't changed?
While the Budget has introduced new flexibility now, and dangled unprecedented flexibility like a carrot, available from April 2015, it’s important to appreciate client needs now are exactly the same as they were before the Budget – there are just more choices available to meet those needs.

An overwhelming need for many retirees is that they still don’t want to run out of money or suffer a dramatic fall in their standard of living. Their attitude to risk and capacity for loss will also be the same as it was before the Budget.

From an adviser perspective, FCA suitability guidance hasn’t changed as yet and most in-house compliance guidelines haven't yet been changed. So it remains unclear how FCA will consider putting those with small funds (eg below £100,000, but especially those with sub-£50,000 pots) into income drawdown. And it will be difficult for any adviser to justify advising those clients with a low attitude to investment risk – so, for example, those 4 and below (on a 1-10 scale) – to open an income drawdown product, even if it is just a temporary solution for 1 year. Even over that short period (and you could argue especially when it’s just for that short period) it could have a significant impact on the client’s capital and their future income.

Annuities remain the only investment which provides insurance against longevity risk - so people don’t run out of money regardless of how long they live. ‘They do come with ‘change risk’ as people may not be able to access flexible solutions after April 2015 with any money held in an annuity.

However phased retirement income strategies can be used to maximise tax efficiency and give flexibility. For example, using part of a customer’s pension pot now to purchase an enhanced or investment-linked annuity, giving them some tax-free cash and income to meet their needs between now and next April. This also builds in a certain level of guaranteed income for life. The remaining pots can be kept uncrystallised – benefitting from 100% death benefits should the client die between now and April 2015 – which will then give flexibility to decide on the appropriate solution after we enter the new world after April 2015.

Copyright © 2014 MGM Advantage, All rights reserved.

Mind the retirement gap of £100,000*

*Or £200,000 if you want your income to rise with inflation and provide for your spouse

Here at MGM Advantage, we've calculated the current retirement funding gap. By analysing official data, we've worked out the pension pot required to bridge the gap to provide two-thirds salary, which according to new research¹, is the average ideal retirement income.

The gap is £5,954 a year for the average retiree, which would require a pension pot in the region of £100,000 using an annuity, or £200,000 if you want your income to rise with inflation and provide for your spouse. These figures do not include people taking any tax-free cash from their pension, so in reality the pension pot required is likely to be larger.

Average income before retirement2	£33,288
Aiming for 2/3rds salary in retirement	£21,970
Current average income in retirement3	£16,016
Income gap	£5,954
Retirement funding gap4	£100,000

These figures show the true scale of the problem facing people approaching retirement. There is a chasm between savings and the ‘ideal’ retirement income, which should serve as a wake-up call for many people.

The scale of the challenge becomes even scarier if want your retirement income to keep pace with the cost of living and provide for your spouse. There are options for people who might have left saving for retirement too late, for example you could consider delaying retirement, continue to work part-time, use equity release or even downsize your home.

The recent changes brought about by the Budget potentially provide more choice for people looking to generate a retirement income. But you still need a sizable pension pot or other savings to draw on to provide a sustainable income. Seeking professional financial advice can make a big difference to the value of the retirement income you could get.

The numbers show some wide variations on a regional basis⁴, with people retiring in the North East and East of England faring better than those in the South East and London.

Tips to a better retirement

• From April 2015, you can use your pension savings any way you like. The first 25% can be taken as tax-free cash, and the remainder used as you wish (all income or capital withdrawals subject to your marginal rate of tax at the time)
• Consider when you want or need to take your benefits – both state and any private pension. You don’t have to use them at ‘traditional’ retirement ages, or when you stop working
• If you have a small pension pot (individually below £10,000 or up to three valued at less than £30,000) you may be able to take the whole pot as a lump sum under the current ‘triviality’ rules (from April 2015 you will be able to take the whole pension as cash, subject to marginal tax rates at the time)
• If an income is important to you, consider all the different options available to you, such as an annuity, an investment-linked annuity and income drawdown. Each of these comes with different risks – income from drawdown or an investment-linked annuity could fall in future (although hopefully it will increase)
• Consider the ‘cost of delay’ – if you are looking for a secure lifetime income, then an annuity is likely to be your safest option. By delaying any decision until next year, you are losing out on income this year, which could take many years to make up
• Think about how much flexibility you need over your income, bearing in mind you may be in retirement for 20 plus years. And if you want to protect your spouse or partner if you die
• With annuities the income is guaranteed but may come with the risk of inflation which means the income you receive may not buy as much in future – you can protect your income from inflation but this comes at a cost
• If you buy an annuity don’t just buy it from the company you saved with. Make sure to shop around other providers, giving full information about your health and lifestyle – this can help you get a substantially bigger income
• Consider taking independent advice. It’s important to get it right. A qualified adviser can help you do that.

Notes

1. Source: MGM Advantage research among 2,028 UK adults aged 18+, conducted online by Research Plus Ltd, fieldwork 17-22 October 2013. The ideal average retirement income was 67% of pre-retirement earnings.
2. Source: ONS ASHE survey 2013, average income for full-time employees aged 50 and over.
3. Source: MGM Advantage analysis of ONS data, The Pensioners’ Income Series 2011/12 for a single pensioner. The figures include all gross income including Social Security Benefits (including Housing Benefit), earnings from employment, private pension income and tax credits.
4. Source: based on current annuity rates, a pension pot of £100,000 would generate an annual income of £5,954 (age 65, single life, level, nil guarantee) or £200,000 would be required at age 65 for an income rising in line with inflation and providing a 50% spouse benefit (spouse is age 62).
5. A map of the regional differences is available from the downloads section of this site.

Billy Burrows: What will good advice look like post-Budget?

Following the Budget announcements, I am trying to get my mind around the potential disconnect between some of the future client behaviour we might see and what will constitute good advice from a specialist retirement adviser.

Take the concepts of tax-efficient income planning and sustainable income. A competent adviser would talk to their clients about both these concepts and point out some obvious but very important planning matters.

For example, it does not normally make sense to take money out of a tax-privileged environment and pay significant amounts of tax on income or capital that is not required. Also, a good adviser would discuss the prudent level of income that should be taken from a drawdown arrangement, that is, what is a sustainable level of income.

Clearly, some people will have a need for capital and therefore in some cases it might make sense to pay a large amount of tax to withdraw what they want but for many people it will still be sensible to use their pension to pay a regular income rather than  take a lump sum. In the US, where many more middle-income people take systematic withdrawals, advisers spend a lot of time designing investment portfolios suitable for income withdrawals of about 4 or 5 per cent of the capital value. This is a far cry from 150 per cent of GAD.

An income is sustainable when it can be maintained at a certain rate or level and there are two things to consider – maintaining the absolute level and maintaining the real value.

A guaranteed, level annuity will maintain the absolute level of income but over time the spending power (real value) of this annuity will be reduce as inflation takes effect. An investment-linked annuity or pension drawdown policy does not necessarily produce an income that is maintained at the same level because it will rise or fall depending on future investment returns and other factors. One of the objectives of these policies is to provide an income sustainable in real terms but there is obviously the risk that the income could be lower, not higher in the future.

The hope is that with near total flexibility at retirement, clients will want to discuss their options before rushing off to do something that might not be in their best interests. Annuities will continue to be an important option for those who are looking for both tax-efficient income and sustainable income.

The Government plans free and impartial face-to-face guidance on the range of options available to people at retirement but many are sceptical of this because it is simply not practical or affordable.

There will clearly be need for specialist retirement consultants to explain and discuss complex options so the industry needs to get their heads together to work out how this will be done.

Billy Burrows is head of business development at Annuity Line

Annuity rates flat in Q1

• Average annuity rates increased by less than 1% in the first quarter of 2014
• Difference between the best and worst annuity rates is 12% for the standard market and 7% for the enhanced market
• There is a 30% difference between the top quartile enhanced rate and bottom quartile standard rate

The latest MGM Advantage Annuity Index1 reveals average annuity rates increased by 0.83% in the first quarter of the year. The data reveals two distinct markets, with a 30% difference between the top enhanced rates and bottom standard rates. The gap between rates also evidences a two-tier market, with the difference between the best and worst enhanced rates at 7%, compared to 12% in the standard market.

Following the strong rise in annuity rates throughout last year, rates were flat in the first quarter of 2014. This is in part due to gilt yields, as well as the returns available on corporate bonds.

Given the uncertainty in the market at present, it is worth remembering that customers who are looking to secure a sustainable income for life face the same decisions as they did before the Budget, and are unlikely to get a different outcome now to post 2015. The cost of delay needs to be considered, as does the potential for annuity rates to go down in the future.

Considering your options at-retirement involves some complex decisions, with the recent changes making this arguably even more difficult. People looking to navigate their way through and create a sustainable income should seek professional financial advice.

It is clear the Budget will have an impact on rates going forward, although it is too early to call how this will play out. We are already seeing reduced demand as some people are postponing decisions until April 2015. This could drive annuity rates down. However, the competitive open market providers are likely to compete even more aggressively for business which might lead to tactical pricing decisions and improved rates for enhanced customers.

1.Annuity rates are based on analysis of data supplied by Investment Life and Pensions Moneyfacts to MGM Advantage (31 March 2014). The analysis looked at level annuities without a guarantee and income levels are based on a pension pot of £50,000 and a retirement age of 65. All rates are on a gender neutral basis. To create total retirement income figures the Index multiplied annual annuity income by 21 years in the case of men and 24 years in the case of women (at age 65). Enhanced rate figures are from a sample of smoker rates and enhanced rates based on health conditions. The Index bases its life expectancy figures on Office of National Statistics figures, using the cohort tables at age 65.

Source: MGM Advantage analysis of annuity rates from Investment Life and Pensions Moneyfacts. The average annuity is calculated from average standard and average enhanced rates.

Long life, not according to the wife

• Males approaching retirement age¹ underestimate how long they will live by an average of 5 years
• Females sell short their life expectancy even further by an average of 10 years
• 79% of males approaching retirement age underestimate their likely longevity compared to 85% of females
• 15% of women don’t expect to live past age 70, compared to 16% of men
• Just over a third of 55-64-year-olds can’t see themselves living beyond age 75

New research¹ shows that 82% of people approaching retirement age are underestimating how long they are likely to live. Men aged 55-64 estimated their average life expectancy to be 81 years old and women estimated it to be 79. Official figures² show that the average 55-64 year-old is expected to live until 86 if male and 89 if female, meaning that men could be in retirement five years longer than expected and women for ten.

It is important that people have a realistic expectation as to how long they are likely to live, so that they can make adequate provision for retirement. The chancellor’s Budget changed the pensions’ landscape forever allowing people more freedom and choice with their pensions. We fully support the idea that individuals have more say over how they access and spend their pension savings.

With increased choice comes the risk that individuals may live longer than they anticipated meaning they may outlive their retirement savings. If you don’t plan properly then the funds built up could be exhausted in later life. This could lead to a decline in living standards and may come at the exact point you need regular income for things such as care fees.

Many retirees are naturally conservative so while increased flexibility may have some appeal, they will also want to make sure they have long-term guaranteed income. The reality is simple, there is no other product in the market that offers such a high rate of return for life than an annuity.

1. Source: MGM Advantage research among 2028 UK adults, 314 of which were aged 55-64, conducted by Research Plus Ltd, fieldwork 17-22 October 2013. Respondents were asked “Being as realistic as you can, approximately how old do you think you’ll live until?”

2. Source: MGM Advantage analysis of ONS cohort estimates of life expectancy - 2012.

28% of the over 55s not comfortable taking on the risk of managing their pension savings

New research¹ from MGM Advantage, the retirement income specialist, shows the risk people are willing to take managing their own pension savings. 28% of the over 55s said they were not comfortable taking on the risk of managing their own pensions to provide a suitable income throughout retirement. The research shows that only 26% of adults aged 55 and over are very comfortable managing their own pension savings, 41% are somewhat comfortable, while 5% don’t know.

A key concern for adults aged 55 and over who aren’t comfortable managing their own pension savings is the thought of running out of money. Two-thirds (69%) said running out of money in retirement is a cause for concern, while making poor choices when investing and the consequences of this were an issue for 64% of adults in this age group. One in two said budgeting for the whole of retirement is a reason to be concerned, as is assessing how long they would live and therefore need to plan for.

With all the hubbub around the Budget, it is easy to forget people’s appetite for loss and attitude to risk. From this research we can see although many people are comfortable managing their own money to provide a suitable income throughout retirement, almost one in three are not.

People approaching retirement will have to make some crucial decisions about how they can maximise the pension savings they have. With the welcome increased choice and flexibility comes more complexity. This is where receiving financial advice will be key, ensuring there is a balance between people understanding the risks to ensure their savings last their lifetime, without resorting to undue conservatism.

Source: All figures, unless otherwise stated, are from YouGov Plc.  Total sample size was 2470 UK adults aged 18+ of which 908 were adults aged 55 and over. Fieldwork was undertaken between 24th to 25th March 2014.  The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+).

Only 3% of the over 55s will blow the lot

New insight¹ reveals the approach people are likely to take when they have full access to their pension pots for the first time following the radical changes announced in the Budget.

The research shows that only 3% of the over 55s find spending their pension savings as soon as they can get access to them the most attractive option.  42% of adults in this age group like the certainty of using an annuity to provide some form of regular income.  43% of the over 55s like the freedom of managing their own money without an annuity but attempting to make sure it lasts throughout their lifetime.

The data also shows some uncertainty following the changes announced last week, with one in ten (12%) of the over 55s not sure which option most appeals to them in retirement.

As a temperature check of how people are thinking shortly after the Budget, these numbers show that the vast majority of people won’t blow the lot. On the contrary, most people like the freedom and choice the new options provide, although many still want to secure a regular income using an annuity.

As we navigate through these changes, the role of advice will be vital to ensure customers maximise the value from their pension savings, while taking advantage of the new choice and flexibility available.

1. Source: All figures, unless otherwise stated, are from YouGov Plc.  Total sample size was 2470 UK adults aged 18+ of which 908 were adults aged 55 and over. Fieldwork was undertaken between 24th to 25th March 2014.  The survey was carried out online. The figures have been weighted and are representative of all UK adults (aged 18+).

Budget 2014: Our response

Flexibility in the retirement income market

George Osborne’s revolutionary budget has been delivered and over the coming days and weeks the finer detail will emerge and the dust will begin to settle.

In the meantime, here’s our update and our view on why we think that annuities will remain, for the majority, the most secure option of guaranteeing a lifelong income. People will still need a retirement income and advisers will play a key role helping people to make responsible decisions on how to secure that retirement income.

The key changes

Changes from 27 March 2014 to defined contribution (DC) pension pots:

• Income drawdown maximum income increases to 150% of GAD tables (from 120%). We believe this wider flexibility will also be extended to our investment-linked annuity.
• More people will have access to flexible drawdown where withdrawals are unlimited. Currently people can only access this if they have £20,000 ‘secure’ income – that limit falls to £12,000.
• More people with small pension pots will be able to take them as a cash lump sum (25% tax free the remainder taxed as income).
• Under triviality the main limit increases from £18,000 to £30,000 where people value all benefits they have across all contracts.
• The size of a small pension pot that people can take as a lump sum under triviality has been increased from £2,000 to £10,000 regardless of total pension wealth, with people being able to cash in up to three pots (previously two).

Changes from April 2015:

• People will have complete flexibility, once they reach age 55, to take their benefits when and how they see fit. 25% will be tax-free with the remainder being taxed at the individual’s highest marginal rate.

Other changes:

• The minimum age from which retirement benefits can be drawn will increase from age 55 to age 57 in 2028. Thereafter it will increase in line with increases to state pension age, so that it is always 10 years below State Pension Age.
• There will be a ban on transfers from public sector defined benefit schemes to defined contribution schemes. Many defined benefit (DB) members may be attracted by the new flexibility in DC and as many of these schemes are unfunded, any mass exodus would cost the Treasury significant amounts.
• A consultation will take place to decide if there will be a ban on transfers from private sector DB schemes.
• A consultation will take place on whether to allow tax-relievable pension contributions to be made after age 75.
• The ISA limit will increase to £15,000 and there will be complete flexibility around how much is held in stocks/shares and cash. And transfers will be permitted from one type to another.

Our view

While people will have much more flexibility from April 2015, many people will want at least some level of secure income for life – a hedge against living too long. Many retirees are naturally conservative so while increased flexibility may have some appeal, they will also want to make sure they have long-term guaranteed income.

The reality is simple – there is no other product in the market that offers such a high rate of return for life than an annuity. And this is the reason why annuities have been the backbone of customers’ retirement income in the UK.

People will need tax planning as to how and when to take their benefits. While taking it all in one go may sound appealing on an emotional level, this means you are likely to pay more tax than taking it gradually, as and when you need it. People don’t like paying tax and so they will want to phase income over a longer period.

While the new rules will allow people to strip assets out of pensions, we have yet to see the Financial Conduct Authority’s (FCA) view on when it will be suitable to do so, and how advisers will be policed in this area. For example, the FCA is unlikely to be comfortable with money being stripped out of a pension at age 55 to be put into a bank account.

This new focus on greater flexibility, and the increased focus on taking advice/guidance around options at retirement, is likely to drive many more people away from their holding provider. So while the annuity market may decrease, much of that decrease will be in the rollover market and it will have less of an impact in the external market in which we operate.

We are optimistic that our Flexible Income Annuity (FIA) will have greater flexibility in future, allowing people to take income from a bigger range than is currently available. This greater flexibility, plus the investment control and the benefit of adding in mortality subsidy, makes it a strong solution.

In summary

We fully support people having greater freedom over how they access and spend their pension savings. However, with that freedom comes a huge risk and the possibility of unintended consequences.

And advice will be key in helping people take advantage of flexibility while ensuring they have a sustainable lifetime income. We look forward to participating in the government consultation and to talking with others about how annuities and new retirement solutions will meet customers’ future needs.

I'm speechless... this Budget was a 'game changer'

I’ve worked in the pensions industry for more than 25 years now, and I don’t think I’ve ever been genuinely speechless. But that changed today. The Government’s proposed changes to pensions, giving people the ultimate flexibility in when and how they take these savings, is literally a game-changer.

We have a range of interim measures coming into effect also immediately. These will allow more people to qualify for Flexible Drawdown, and higher income to be taken from capped drawdown. This increased flexibility should also be extended to investment-linked annuities. At the same time, much needed increases have been announced to the triviality rules. In simple terms people can take pots up to £30,000 as a lump sum. The standalone rule – which allows pensions to be encashed without reference to other pension savings – has increased from £2,000 to £10,000 with people being able to cash in up to three pots.

But all of that is merely a prelude to the main event. From April 2015, people can take their pension benefits as and how they wish once they reach age 55. The quid pro quo is encashments above the 25% tax-free cash level are subject to income tax, at the individual’s marginal tax rate.

This flexibility sounds fantastic, and will be hugely beneficial in the right circumstances. But there is a very clear need for advice. The worry is some people will operate on an emotional level and simply cash in all of their pension pot at once. Then use it to buy a car, go on holiday to Australia, or put it all on the 3.30 at Newmarket. That may sound flippant but there will be a huge need for people to consider the tax impacts around when they take their benefits – why pay 40% tax to simply put the money in a bank?

And crucially, while flexibility is great, many people will continue to need a secure certain income which will last for the remainder of their life. Or, in other words, an annuity.

Finally the Government banning transfers from public sector defined benefit schemes is an interesting move. I doubt we’ve heard the end of this, as members and unions will be arguing they should get increased flexibility in line with defined contribution members.

'Pie in the sky' Lifetime Allowance not just a concern for richest savers

MGM Advantage is warning that savers may be unaware of the effect that the revised Lifetime Allowance limit of £1.25m will have on their retirement.

As an example, someone aged 40, who has no previous pension savings, starts to pay 12% of a £90,000 salary into a pension (combined employer and employee contribution rate) could exceed the Lifetime Allowance by the age of 65¹.

Andrew Tully, Pensions Technical Director, MGM Advantage commented: ‘People may think all the talk of a £1.25m Lifetime Allowance is like pie in the sky. But many people could find themselves fall foul of the rules and unsuspectingly get caught out by a tax charge. Our figures show just how easily the limit can be breached, even if you haven’t started saving into a pension before.

‘The position gets even more complicated for savers with final salary pensions, as well as other private provision. This is where seeking professional financial advice will pay dividends in ensuring any relevant protection is in place and that all your options have been considered.’

Where people have made contributions into pensions, the current pot sizes (valued today) in the table below could exceed the Lifetime Allowance at age 65 with no further contributions being made.

Age	Current value of DC pension2
40	£291,248
45	£389,756
50	£521,581
60	£934,073

A £1.25m pension (having taken 25% tax-free cash of £312,500), would generate an annual index-linked income of £26,850 for a healthy 65-year, with a 50% spouse pension³.

Sources:

1. Source: MGM Advantage. Assumes a 6% investment return, after charges. Salary increases at 4% annually.
2. Source: MGM Advantage. Assumes a 6% investment return, after charges.
3. Source: Average rates from Money Advice Service annuity comparisons (10.3.14).

eBaby Boomers: A fifth of Britain's post-war generation sell possessions online to meet cost of living

MGM Advantage, the retirement income specialist, has identified the emergence of Britain’s eBaby Boomers as one-in-five of the post-war generation are selling their possessions online in a bid to meet the rising cost of living. Such is the level of concern over making ends meet, it is now the single biggest fear for adults when considering retirement, above even concerns over health.

Published today, the findings1 illustrate the financial situations of UK adults, including those who are approaching, or have just begun their retirement. 53% of all UK adults said the cost of living is their main fear for retirement, above keeping fit & healthy (45%) and losing a spouse or partner (32%).  The rising cost of living is also most likely perceived to be the single biggest financial threat to retirement plans (37%), above not saving enough (30%).

In response to spiralling living costs 21% of the baby boomer generation are selling their possessions online to maintain their standard of living, a group MGM Advantage has termed the eBaby Boomers.

Andrew Tully, Pensions Technical Director, MGM Advantage said: ‘Far from being immune, members of the baby boomer generation are, like many others, grappling with the UK’s rising cost of living.  At a time when we would hope such people were saving in preparation for retirement a large number are instead selling off their possessions on eBay just in order to make ends meet.  It’s a situation that is unsustainable and a potential horror story for the eBaby Boomers when they retire.’

Other ways being considered to bridge the living standards gap include selling homes. Of those people already in retirement, 30% now plan to move house in order to help fund their on-going living costs.

Andrew Tully said: ‘We’re used to people in the UK moving to the coast when they retire. But, what we are seeing now is less about aspiration and more about necessity.  Baby boomers and others in retirement have been hit hard by the rise in the cost of living and they’re resorting to selling property and possessions in order to make ends meet.’

The cost of living has risen for three and half years, as price rises have outstripped pay rises. Although the rate of inflation, measured by the Consumer Price Index, fell to 1.9% in February 2014, it continues to outpace increases in earnings, which grew by 1.1% according to the ONS.

1. Source: MGM Advantage research among 2,028 UK adults aged 18+, conducted online by Research Plus Ltd, fieldwork 17-22 October 2013. Baby boomers are currently 50 – 68 years old.
Erosion of purchasing power: Each year 90% of people who convert pension savings into retirement income use an annuity with no escalation. The average pension pot at retirement is around £33,000. If inflation averaged 3% over a typical 25-year retirement, the real value of the income would reduce by 53%.

Intrinsic Cirilium funds added to investment-linked annuity

The addition of the Cirilium funds to the Flexible Income Annuity product allows Intrinsic advisers to offer more choice to clients and manage their portfolios seamlessly and consistently.

In the current economic climate, with clients looking for a better return from their annuity, our investment-linked solution can provide income growth, will take into account health and lifestyle, and help mitigate the risk of inflation.

Chris Jones, Head of Financial Planning, Intrinsic Financial Services, commented: ‘The Cirilium fund range is highly regarded on account of its risk control, diversification and track record. We are delighted that MGM are choosing to include these funds within their investment-linked annuity range.’

About the Cirilium fund range and Flexible Income Annuity:

The Cirilium fund range is available on a whole of market basis and can be used by Intrinsic and Positive Solutions advisers using the Flexible Income Annuity for clients. The funds are managed by Intrinsic Cirilium Investment Company Limited.

Intrinsic Financial Services was established by Lord Leitch, the former global CEO of Zurich Financial Services life businesses. The venture has the financial backing of Friends Life and South African insurer Sanlam. Intrinsic launched in March 2006 and currently has more than 2100 advisers in the UK. The Intrinsic Group has a current annualised turnover of over £120m.

The Flexible Income Annuity offers advisers and their clients a choice of eight risk rated funds, in conjunction with Morningstar OBSR, covering both active and passive investing.

Act now to protect your clients' pension benefits

Another tax year, and we see another reduction in the lifetime allowance and personal allowance for pension benefits. Come April 2014, these will reduce to £1.25m and £40,000 a year respectively. Whilst these changes won’t affect all of your clients, there will be some who will be caught. And these clients need to act now to make sure they protect what pension benefits they have already built up.

Paying in more than £40,000

Although the personal allowance will fall from £50,000 to £40,000 from April 2014, those who want to pay in more than that do have some options. By using carry forward someone paying in a lump sum after April 2014 with a pension input period (PIP) ending in 2014/15 could pay in up to £190,000, depending on the size of the pension contributions they have made over the previous three years.

Protecting pension benefits

Those who have already built up benefits over £1.25m, or are likely to do so, will want to protect these against the fall in lifetime allowance. These people are spoilt for choice; they can use two different types of protection – individual protection 2014 and fixed protection 2014.

How do the protections work?

Fixed protection allows clients to keep a lifetime allowance of £1.5m, but only as long as they do not make any further contributions or have benefit accrual in a defined benefit scheme above a ‘relevant percentage’.

If in the future, legislation is introduced to increase the standard lifetime allowance above £1.5m, then fixed protection is revoked, and individuals will be able to begin contributing to pensions again.

The legislation for individual protection is not yet finalised – instead it’s expected to be included in the Finance Bill 2014, which will become law about July 2014.

However, we do know individual protection is designed to protect benefits between £1.25m and £1.5m. Those with benefits valued above £1.5m will still be able to apply for it, but protection will be capped at £1.5m. The individual protection 2014 amount will become their personal standard lifetime allowance, and anything above this amount will be taxed at a rate of 55%.

What protections should clients apply for?

Some clients will have more influence over their remuneration package than others. If, for example, they are able to negotiate a higher salary in return for no further employer pension contributions, then they may want to opt for fixed protection.

But others won’t have this option. If they benefit from employer contributions but are unable to take an alternative (for example higher salary or dividends or other benefits) then they may want to consider individual protection. Even though they will pay 55% charge on anything above their personal LTA, they will still receive 45% of anything built up, and that is better than 100% of nothing.

Fixed protection takes precedence over individual protection, but if your clients have funds above £1.25m it’s worth applying for both. So if fixed protection is broken – for example they pay in a contribution because investment markets have been poor and they want to boost the value of their pension fund before retirement – then they can then rely on individual protection.

Fixed protection and automatic enrolment

Employers are required on their staging date to automatically enrol all qualifying employees into a pension scheme and to pay contributions for them. People who have fixed protection 2014 need to make sure they opt out of the automatic enrolment pension scheme within one month, otherwise their fixed protection will be lost. They will be automatically re-enrolled every three years, and will need to make sure they opt out each time. The obligation is on the individual to opt out – no-one else can do this for them.

What should clients do now?

If your clients are opting for fixed protection then it may be worthwhile maximising pension contributions before 5 April 2014. They can carry forward any unused annual allowances (subject to having sufficient earned income) to make a significant pension contribution now.

They have until 5 April 2014 to make their bid for fixed protection, but until 5 April 2017 to apply for individual protection.

Conclusion

As we see further cuts in the pension benefits, protecting what clients have already built up becomes even more important, and even more complicated.

Fixed protection 2014 and individual protection 2014 give clients options about how to protect their benefits, depending on how much they have and whether they are able to re-negotiate their remuneration package to replace the value of employer pension contributions.

As the deadline of 5 April 2014 approaches, you can help your clients make sure they are in the best position to protect their future retirement income.