Post-Budget Retirement Income Planning: Sustainability, Sustainability, Sustainability....
Following the surprise proposals in George Osborne’s budget statement on Wednesday, the Retirement Income industry mantra must now become ‘Sustainability, Sustainability, Sustainability’.
We have long advocated the growth of annuity alternatives but never expected this to be achieved in such a dramatic fashion. However, despite the radical changes the challenges and fundamentals of retirement planning have changed very little. The need for specialist advice and sophisticated cash flow modelling is as strong now as it ever has been.
The question that most investors will be looking to solve is how much income can I take to meet my requirements in the short, medium and long term - ‘How can I sustain my standard of living?’. This is, and always has been, the core basis for effective retirement income planning.
What has changed?
- Smaller funds will be attracted to cash-out options rather than buying an annuity.
- Some investors will spend their pensions 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 inferior investments, is better than leaving it in their pension.
- More investors will be attracted to and aware of pension drawdown strategies.
- Investors will have increased flexibility to meet short and long-term needs like never before.
- With increased flexibility and choice there is a need for more specialist advice.
What hasn’t changed?
- The risks in retirement remain the same; longevity, inflation, investment, withdrawal, flexibility and possibly the desire to leave pension monies to your beneficiaries.
- Most retirees don’t want to run out of money or suffer a dramatic fall in their standard of living.
- Retirees not buying an annuity will need help to maintain a sustainable retirement income to meet their needs.
- Annuities remain the only investment that can provide insurance against longevity risk (and inflation if selected).
- ‘It’s not whether but when to annuitise’ remains a key consideration for the majority with age, health and other resources all affecting ‘when’ annuities should be considered.
- Phased retirement income strategies will continue to be best practice to maximise tax efficiency.
There are details from the budget announcement that still require further consultation and elaboration but our initial thoughts on advice consideration are as follows:
- While much of the media has been lambasting annuities, they remain the only retirement income solution that can provide guaranteed income for life. For clients who are not willing or are unable to take on any investment risk, an annuity is likely to remain the best option.
- As has always been the case, OMO and enhanced annuity options must be considered and ‘shape’ should be the first consideration.
- Clearly, if recommending an annuity today, it would be wise to explain the options that will be available in 2015, particularly to those with smaller pension funds.
Future cash-out pensions:
- Some clients may prefer to sacrifice income for the next 12 months or make-do with tax-free cash entitlement so that they can access their pension in full in 2015.
- An adviser is unlikely to recommend a pension cash-out as people with small pots, where this is most likely, will be unlikely to pay for advice.
- However, some clients may be willing to pay for advice on temporary drawdown contracts.
- For clients with larger pension funds, income tax implications and the need to deliver sustainable income are unlikely to result in a cash-out recommendation.
- By removing the link to GAD and the need for GAD reviews, the government is effectively removing its ‘unspoken advice’ of how much people can take from their pension.
- Flexible drawdown is set to become the norm post 2015 and while the flexibility and choice is attractive, clients will still need advice on achieving a sustainable income and managing all the risks faced throughout retirement.
- Ongoing advice will be essential to reflect changes in client circumstance and market changes.
- Some clients will demand the increased 150% GAD income from their next plan anniversary date and advisers need to be ready and equipped to discuss the issue of sustainability and the risk to long-term retirement income of adopting this strategy.
Contact us to see how Intelligent Pensions can help you and your retirement planning clients.