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.
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