The British Government’s budget in March was nothing short of transformational in the way it shifted the pensions and savings landscape at one fell swoop, although it remains to be seen how the authorities in the Isle of Man and Channel Islands react to the changes.
From April 2015 anyone over the age of 55 in the UK will be able to take their entire pension pot as cash rather than having to buy an annuity.
The change has clearly struck a chord with many people, who see it as a liberating policy which enables them to make their own decisions about how to spend or invest their retirement savings.
Some people might decide that their pension pot, locked up during their working life, will provide a nice lump sum to use to celebrate retirement with a holiday or – as the pension minister admitted – a Lamborghini sports car.
But it will be clear to all that in doing so, they take away the option of using those savings when money is tight in retirement, especially if they underestimate how long they are going to live for.
In Australia, where people are already able to withdraw lump sums easily, the evidence suggests that most retirees invest the money or use it to clear debts, including mortgages. Only a few choose to splurge on holidays or cars. Australians, in fact, would seem to take a sensible approach to their pension pots. I think people in the UK will do the same.
Now pensioners in the UK are no longer being forced into investing in annuities, they will be looking for other higher-yielding investments and that might mean a rise in buy-to-let investments.
But with those higher yields come higher risks, of course. Buy-to-let may certainly benefit from the changes but it’s as well to also remember that a recent review of annuities found that the average pension pot was only £17,700. That is hardly enough for a deposit, let alone a house or flat.
There are also tax implications for those thinking of taking a cash windfall in retirement. Put simply, the money will be categorised as income, so will be subject to income tax. Anyone taking out a large amount in one go, might find income tax is levied on some of it.
Instead, retirees might decide to take it out in small chunks over the years, stick with an annuity, or seek advice for tax planning.
The amount of money tucked away in pension pots might not be very big – not enough, as mentioned earlier, for most to buy a property. But these are the kinds of sums which could be used as a loan to grandchildren who are struggling to get on the housing ladder or a gift to help pay for private education or to cover student debts.
It remains to be seen whether the reforms will encourage a savings culture in the UK and fears have been expressed that working-age people might accrue debts with the intention of using their pension pots to pay them off.
There’s also the question about whether this is a policy which might be reversed or reformed by a future government. That’s an impossible one to answer but, electorally, one can’t help imagining that reintroducing annuity shackles would be a difficult sell.
Perhaps the most important point to make about the liberation from annuities is that people must take proper advice when they consider the options before them. They will certainly be able to seek potentially more attractive investments than annuities have traditionally offered but an assessment of risk and income requirements is paramount.
For most investors with pensions and savings, the sustainability of good returns will be important and it can be difficult to determine which investment managers are capable of delivering those results.
Quilter Cheviot manages investments on behalf of a wide range of pension schemes. Our expertise is built on a solid foundation of understanding risk, interpreting investors’ needs and then shaping an appropriate investment solution to best meet those needs.
Our Managed Portfolio Service (MPS) can be the ideal choice for those saving for retirement. The service provides a range of discretionary investment portfolios with eight active strategies to choose from – from Defensive (low risk) to Adventurous (high risk). These investments are made exclusively in collective investment schemes to provide greater diversification.
Our MPS offers a client-centric investment proposition, backed by performance figures which demonstrate why we are one of the most popular choices for clients seeking a carefully managed pension portfolio solution. Several of these strategies are also mapped by Synaptic's Risk Rating Service to aid financial advisers with their suitability assessments.
So tell your clients to count to ten when they see that Lamborghini in the showroom – and seek some investment advice instead.
Quilter Cheviot is one of the UK’s largest independently owned discretionary investment firms, which can trace its heritage to 1771. Our firm is based in thirteen locations across the UK, Jersey and Ireland and has total assets under management of £15.5 bn (as at 30 April 2014). Quilter Cheviot focuses primarily on structuring and managing bespoke discretionary portfolios for private clients, charities, trusts, pension funds and intermediaries.
We are at the forefront of development and innovation. We led the way in developing outsourcing solutions for financial advisers, providing access to a range of managed portfolio strategies constructed using carefully researched funds.
Our investment managers are committed to building long-term relationships with financial advisers and their clients, established on a foundation of exemplary personal service and investment expertise.
Our commitment to excellence has been recognised by the award of a Defaqto 5* rating for both our Managed Portfolio Service and Discretionary Portfolio Service in 2013.
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