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%.