Pension freedoms – 1 year on
As we reach the end of the first year of pension freedoms, AJ Bell’s Head of Platform Technical, Mike Morrison, tells us how thinks it’s gone so far.
How would you review the first year of the freedoms overall? Would you say they’ve been a success so far or not? What needs to be improved?
In many of my presentations in the run-up to April 2015 I divided the retiring community into three. The first group are the top end - those savers with large pension funds and other assets. Here my view is that the extra flexibility has been welcomed but hasn’t changed the way people plan for retirement other than the new rules on death which can allow some tax-efficient estate planning.
The second group is the bottom end of the market – people with small funds of say £60K or less. These people probably would not miss the income from the funds, and might get more satisfaction from spending the money – perhaps paying off debt, making home improvements or even taking a holiday of a lifetime.
In the middle is the third group – those with medium-size pension funds who need an income for life and who might previously have bought an annuity.
We have seen some of the smaller funds being accessed and spent with growth in the income drawdown market at that end.
Views will always be mixed on whether it has been a success – maybe it depends on your philosophical standpoint (freedom v paternalism). What we can say is that the freedoms have been used and people have been talking about pensions in a positive way. (Until rumours of a change to tax relief intervened and threatened a backward step!)
There is always room for more guidance and information to make sure decisions are informed – particularly on tax issues and potential investment scams.
From your chats at events around the UK with advisers and financial planners, what are the main points that stand out about the difficulties and successes they’ve had with it? What kind of messages have they conveyed to you? What trends have you observed?
It seems to be the case that those with a good adviser relationship have taken advice and, in many cases, found alternative solutions to cash needs that hasn’t involved accessing their pension. Many who don’t have advisers, and have had smaller funds, have approached providers directly and taken the money.
Advisers have also told me of potential clients wanting DB TV sign off, and the demand for transactional business that they really do not want.
Have you heard any tales of wild spending on things like Lamborghinis, as originally suggested might happen? If so, what are the details? Are there any fascinating elements to emerge from the reforms that you think would be of interest to planners; maybe things you think haven’t been highlighted much in the media elsewhere?
Surprisingly, I have heard very few strange spending projects – the good news is most people worry more about the tax consequences of accessing their pension fund. There has been suggestions of the odd car, a tongue in cheek mention of a Thai Bride that made me smile and a few cruises but that is about it.
The one that showed the whole process in context was when an adviser told me of a client who had come in for a net £250,000 to buy a flat for a son who was going to university. Having looked at the numbers and the tax implications, the client took out a mortgage to buy the property – the tax bill would have been too much!
There are changes to death planning, pensions and divorce and a whole area for advisers to offer their professional planning services.