What is changing?
Pensioners are being given more freedom with their retirement savings, with all restrictions on access to pension pots removed from April next year.
At present savers can take 25% of their pension pot tax-free when they retire. This will remain, but the tax on withdrawing the rest of the cash will be cut, making it easier for people to use their entire fund as they wish. Experts say that this will mean more people choosing to take greater sums from their pension and avoid purchasing an annuity, the hated financial products designed to provide an income for life.
Who is affected?
Anyone saving into a personal or workplace pension scheme, where payouts are based on the performance of the fund, rather than the person’s final salary. Figures from the Office for National Statistics show that, in 2012, 28% of employees were paying into final salary schemes, 17% were in these so-called “defined contribution” schemes, while the remainder were not contributing to any pension schemes – so around one in five employees are affected.
Auto-enrolment is aimed at getting everyone saving, and kicked off in autumn2012.Up to 11 million workers will be put directly into a workplace pension scheme, where both they and their employer pays in. The majority, if not all, will be enrolled into a defined contribution scheme. The introduction of auto-enrolment is arguably one of the factors that contributed to the budget pension changes, because it hugely increased the number of people who would most likely spend the money they had saved on an annuity at retirement.
What’s wrong with annuities?
Called a “ripoff” by some pension experts, payouts have dramatically fallen over the years in line with interest rates. Once you buy an annuity, you are locked into the income it provides for life, with no possibility of this increasing if rates improve. You also cannot pass on any remaining pot to surviving family. So if you buy an annuity and die two years later, your remaining pension pot goes to the annuity provider. It is possible to buy one with a guarantee that will pay out any remainder on death to surviving family, but these are more expensive, while any remaining lump sum left is taxed at 55%, making them unappealing.
Today a 65-year-old man with around £30,000 could buy an annuity paying out an average rate of 6%, or £1,800 a year, according to Annuity Direct, rising to £6,000 for a pot of £100,000. The highest annuity rate over recent decades was more than 15% in 1990.The last time annuity rates were in double digits at 10% was 1998.
Only last month the Financial Conduct Authority issued a report in which it said millions of older people were getting a poor deal from Britain’s multibillion-pound annuity market, with the biggest losers those with the least money put aside for their retirement. Against that backdrop, the government would have been worried that it might in future face accusations that it was in effect forcing the millions of people it was auto-enrolling over the next few years to buy terrible-value products. Yet still around 420,000 people choose to buy annuities every year with their pension. The upside of these products, stress financial advisers, is the security of income until death to avoid the risk of pensioners frittering away their retirement fund.
What about the role of advice?
The government has said there will be a legal obligation on pension providers to offer advice. However, research by the consumer group Which? shows that only 42% of consumers coming up to retirement trust their pension provider to act in their best interest. The fear is that a lack of advice could prompt a resurgence of mis-selling scandals of the past. Also the risk retirees may squander their retirement fund with the likelihood that they will be targeted by holiday companies or other luxury pursuits that are popular in early retirement years, or even confidence tricksters keen to grab some of the cash lump sum. The need for financial advice will be vital, but many will be unable to afford this. This issue needs addressing following the announcement that stunned the pensions world.
Fortunately, here at DLR Accountants we are more than happy to offer you small business advice when you get in touch with us.