What does pension reform mean for retirement planning?
In November 2014, Tilney Bestinvest Director of Financial Planning
Tim Stalkartt presented at the Westminster and City Annual Conference
on Annuities and Drawdown. His theme was the impact of pension reform on
wealthier clients. In this factsheet Tim provides a précis of his conference talk.
‘The most radical change to pensions for 100 years; you can use your pension
just like a bank account; 200,000 plan to take out their lifetime pension savings on
6 April and enjoy the holiday of a lifetime.'
Tim Stalkartt
We have read the headlines and heard the rhetoric, but what do the Chancellor’s reforms mean in practice?
To help inform us, I look at current retirement strategies and argue that these predict future behaviour.
When people woke up on 20 March to the headlines about pension reform, their retirement goals and objectives
had not suddenly changed. Almost universally, our clients’ goals are to:
1.
2.
3.
Achieve a sustainable income for life
Protect their spouse in the event of their death
Provide a legacy for their family
And the role of the financial planner also remains unchanged:
1. Understand the client’s needs
2. Create a strategy
3. Provide an ongoing review service to ensure the strategy remains on track
4. Tell it how it is – by which I mean the job is not always to do what the client wants, we have to be truthful
and transparent to avoid any longer term issues.
Given our clients’ objectives, our retirement planning strategy is driven by certain guidelines – a client’s time horizon is
probably longer than they think it is, a client’s lifestyle needs to be sustained, the basics need to be ensured (with
everything else as a bonus), the client should be guided by safe rate of withdrawal rules, and the portfolio should be
positioned so that they are never a forced seller.
The main client concern is running out of money, and there is no question that people are living longer – a significant
number of clients have parents living well into their 90s. This means it is prudent to plan with the expectation that your
savings will need to sustain you for 30 to 40 years, and the one thing I can say with certainty is that the future is
uncertain. We just do not know how long we are going to live, how long we will stay healthy and active or what the future
cost of living will be– and these are just the known unknowns.
This is why we put the emphasis on creating a sustainable income strategy, where we can plan for the fact that if the
worst happens, clients can still eat and pay their bills. We encourage clients not to be too generous too soon with their
gifting policy, because their lifestyle is the priority after all.
Flexible drawdown has been available since April 2011 for those who met the minimum income requirement. At the
time the Government stated that as long as you have a minimum guaranteed income of £20,000 a year in retirement
you can take out as much of your pension as you want, whenever you want - but remember, apart from 25% tax-free
cash the money will be subject to Income Tax. In the current reforms the Chancellor has simply extended this flexibility
to everyone, and without insisting on any “safety net” of minimum income.
Clients have been attracted to flexible drawdown because it provides freedom of choice. Importantly however, not one
client has withdrawn in excess of the maximum level suggested by the government actuaries. They are able to, but
crucially they listen to our advice about sustainable income.
1 of 2
TilneyBestinvest | Law Scotland | Fact 12
What does pension reform mean for
retirement planning?
While conducting research for my presentation, I looked at experience in countries that are deemed “ahead” of us in
pension matters – namely the US and Australia. Worryingly, their precedent is not positive: in the US 45% of people are
running out of money in retirement, and that figure is 50% in Australia in 15 years. There is some evidence that
Americans (who on average save two-to-three times the amount that UK savers do) run out because they base their
planning on average longevity. Unfortunately average longevity is just that: an average, so half will die before the
average, and half will live longer. As our clients are all unique we ignore longevity statistics.
We do use cash flow modelling, which gives a valuable sense check of whether expenditure is likely to be sustainable,
if money can be given away without risking lifestyle, and the investment return needed to maintain lifestyle. The
modelling is based on agreed assumptions, and whilst we need to understand the limits (as with any modelling), it is
helpful and in our view better than anything else available. We have just updated our modelling software, so let us
know if this is something you would like us to undertake for your clients.
We always predicted that the biggest change for retirement planning would result from reform of the treatment upon
death. The Chancellor surprised us again late in September when he announced that if death occurs before age 75
there will be no tax at all for beneficiaries – whether they take benefits as a lump sum or as an income. There is also
no difference whether you have started taking benefits from your pension or not (and it was confirmed in the Autumn
Statement that dependents benefitting from a joint life annuity could also receive their income tax free). On death
after 75 tax is at beneficiaries’ marginal rate of tax (45% on lump sums until April 2016).
Our view is that there is now an incentive to keep money in a pension environment, especially as there is a big
difference to non-pension assets on death before age 75. A tax-free income for life for a spouse is highly attractive.
So the theory now is draw income first from non-pension assets. But… there is a question of trust. Governments have
used pensions as a political football for far too long. I call for pensions to be taken out of politics, perhaps by
establishing an independent body that echoes the Bank of England’s role with interest rates. Such a move would
immediately result in certainty, confidence and the ability to plan ahead.
So what will the future look like? We don’t think that it will look very different from current best practice. Your
expenditure requirements could be met from a number of sources, and the challenge is to minimise the tax leakage
to the exchequer by using personal allowances and ensuring that assets are prudently divided amongst spouses.
The UK has more tax codes than any developed country, so income planning is complex. Rules also change, hence the
importance of a review so that we can guide clients on a sound strategy to meet their requirements for the coming
year – for example to take account of special holidays, one off purchases, or a period of earned income.
I conclude that decumulation strategy is difficult. There are a lot of moving parts and key unknowns – how long will
you live, what will your future expenses be, and what about future investment returns? The biggest fear remains
running out of money.
The Chancellor has successfully changed the perception of pensions, but in our view hasn’t addressed this basic fear.
He has introduced more candy into the sweetshop – new flavours and more temptation. But we say resist! Do not
spend all of your money at once – it’s got to last a lifetime…
Contact : [email protected]
IMPORTANT INFORMATION
The value of your investments, and the income derived from them, can go down as well as up and you
can get back less than you originally invested. The decision to access your pension is an important one
and will affect your income and possibly your standard of living for years to come. Therefore we
recommend that before any decision is made you receive regulated financial advice or seek guidance.
Visit Pensionwise.gov.uk to find out more.
Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
This document does not constitute personal advice. If you are in any doubt as to the suitability of an investment,
please contact one of our advisers. Please note we do not provide tax advice.
This document is for professional use only. It is not intended for use by retail clients.
2 of 2
TilneyBestinvest | Law Scotland | Fact 12
V1-5.15
The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment
Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706)
all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair,
London, W1J 5BQ.
This document has been issued by Tilney Investment Management