George Osborne caused an almighty stir last April when he announced that, as of 2015, ‘Nobody will have to buy an annuity.’ He was referring, of course, to the biggest shake-up in the UK pensions industry for almost a century.
More specifically, he was talking about giving the nation’s 13 million pensions savers ‘complete freedom to draw down as much or as little of their pension pot as they want. No caps. No drawdown limits.’
Since then, the media has been awash with scare stories ranging from feckless individuals blowing every penny of their savings on a Lamborghini, to the entire annuities and life assurance industry going into meltdown.
It’s certainly true that the proposed reforms had an immediate effect on the providers of annuities. Share prices across the life insurance sector plummeted overnight, with many wondering if Armageddon had arrived ten years early.
Among commentators and industry insiders, the writing had been on the wall for annuities for quite some time. A low-interest economic environment – alongside the perception that administration costs and margins were ominously high – are just two reasons why annuities were seen as fatally flawed.
It didn’t help, of course, that savers could only access a maximum of 25% of their pension pot as a tax-free lump sum. To put your hands on the rest would invite an eye-watering 55% tax liability.
A major effect of this was to discourage many savers from shopping around for a more lucrative investment vehicle at retirement age. Savers were persuaded, albeit reluctantly, to accept the lacklustre annuity options of their existing insurance company. Fortunately, the 2015 legislation will change all that.
Although April’s announcement was a bolt from the blue for the retirement sector, the new pensions’ landscape will undoubtedly benefit future generations of savers.
Not surprisingly, life insurance companies and annuities providers have been frantically working out a coherent response to Osborne’s axe. Banks have also been looking to get in on the act.
It now seems likely that new and modified financial solutions will begin to appear that inevitably include an element of the ‘annuity concept’ in the mix. That is to say, pensioners will always need a regular, reliable and risk-free income. With this in view, annuities will still be around in spirit, but probably living under another name!
The dramatic nature of the announced reforms should be seen in the context of the Government’s dilemma apropos an ageing population and its moral duty to ensure that everyone has enough money to live a dignified life in old age.
As Tom McPhail of leading financial services company Hargreaves Lansdown plc says:
“These reforms will make pension saving much more attractive for everyone and get more people saving for their retirement.”
This underpins what most of us have known instinctively for years – namely, that it’s no longer realistic to sit back, do nothing, and expect the State Pension to provide a decent standard of living.
If the new pensions environment forces more people to take responsibility for their own wellbeing throughout ever-lengthening retirement years, that has to be a good thing.
State Pension provision in the UK at anywhere near the level needed to enjoy a civilised standard of living is unsustainable for our rapidly ageing population.
A major headache under the new regime is that individual pensioners will have tens of thousands of pounds sloshing around in their bank accounts for 20 or 30 years or more. Knowing how best to maximise returns on this money will be a real challenge for the pensioners of tomorrow.
The Government has recognised this in setting aside a £20 million fund dedicated to providing free and impartial advice. Unfortunately, for many retirees – especially those with more complex financial affairs – this advice, even if availed of, will very likely fall short of what they really need.
An alternative option to complement the Government’s initiative is to seek advice from Independent Financial Advisers (IFAs). Maximising growth and financial returns from a lifetime of saving – followed by a possible three decades of responding to changes in lifestyle that accompany the ageing process – makes for a highly volatile scenario where expert and ongoing financial advice is needed as time goes by.
Until this year, it was arguably less imperative to seek independent financial advice. As already mentioned, savers would typically revert to their existing life insurance company’s default annuity product when they reached retirement age.
There’s no doubt that annuities have always brought long-term stability to the retirement products market – and there are still enough options around to make annuity a viable choice for many people. Whether these will bring optimal returns (and whether these products will continue to be available) in the future, is uncertain.
Freedom With Responsibility
As hinted at previously: alongside the greater freedoms ushered in by the new pensions rules comes a responsibility to ensure that the original purpose of saving for one’s old age is not negated in a few years of post-retirement madness.
This is underlined forcibly by Sarah Lord of wealth management consultants, Killick & Co. Although welcoming the greater choice and flexibility that George Osborne’s reforms will give to pensioners, she sounds a note of caution, pointing to the dangers inherent in individuals having unfettered access to their pension pot:
“This is not suitable for everyone,” she says, “as they would deplete their fund over time.” Implicit in what she’s saying is that the predictability of products like annuities have hitherto minimised this type of catastrophic risk, counter-balanced of course by their relatively unattractive yields.
In the post-Osborne era heading up to 2015, expect to see innovative financial products that remove the drawbacks of annuities whilst incorporating flexible features that are responsive to the increasingly diverse needs of consumers.
Above all else, these monumental changes in the market highlight the need for individuals to have an appropriate financial strategy. Given that strategic financial planning is outside the scope and experience of most pension savers – and which, for most people, is ‘pie in the sky’ – the need for independent financial advice was never more apparent.
ABOUT THE AUTHOR
Mike Beeson is a highly experienced copywriter, journalist and PR consultant. His company, Buzzwords Limited, was established over 20 years ago and is located in Manchester. Tel 01457 764050.