The Death of Retirement?
In this article we look at how Pensions Freedom has completely changed the perception of retirement in the UK (Click here to see our bulletin from the original announcement). Indeed the effect could be called the death of retirement as we know it. Those of us who have been in the business for a very long time, remember the days when the Revenue would approve a Scheme if it demonstrated that the funds would be used to provide a pension in retirement for life.
Pensions Freedom has seen the Pension for Life Disappear
Although the provision of a pension may still be the basis of setting up a pension scheme, the perception by those who have reached 55 in the new world of Pensions Freedom can be very different. A pension for life has clearly disappeared as Members of Money Purchase Pension Schemes can now take what they want out of their fund after 55 to fund a variety of activities including holidays, children’s weddings, paying off debts and even purchasing Lamborghinis.
The latter point about purchasing Lamborghinis, was not actually spoken by Steve Webb, the Pensions Minister at the time, in his presentation. It was, however, suggested by a journalist in the audience when he was announcing Pensions Freedom and Webb replied “yes if they want to”.
The Perception of Annuities has Changed Too
The perception of buying an Annuity in the future to safeguard pension benefits in old age has also gone out of the window and this is where vulnerable Clients thoughts come to mind. We, as IFAs with Clients we have known for a long time, will inevitably be put in a position of dealing with a Client who is in drawdown in their 80s and 90s taking income from a product that is high risk to the Client because it is invested on the stockmarket and does not give any guarantees. If an Annuity had been purchased at the age of 75 then the risk would have been with the insurance company as an Annuity is a known amount of income being provided for life.
We Could See Many People Working in to their 70s
Gone are the days when someone would retire from a job where they have been there for 30 or 40 years at the age of 65 and enjoy an income from the State and from Personal Provision and/or through workplace and this would be guaranteed for life. For some, in the future, the State retirement age may well be 70 with no guarantees on the figure with the possibility of people working well into their 70s.
We are now seeing more people retiring in their late 50s and using their retirement pots to supplement income from a less stressful more relaxed job on a part-time basis.
For all these reason, the definition of retirement now is very different to 10 years ago, or even as recently as March 2014, when Pensions Freedom was first announced by the government.
We also have the prospect of using a retirement fund for inheritance tax planning whereby Members who do not need any income from their fund can preserve it within a very tax efficient retirement vehicle, just take out the tax free cash sum and invest the rest within the pension product until they pass away, and then this is passed on tax efficiently outside the Members estate to friends and family. For a beneficiary to receive a pension from a deceased’s pension fund, the beneficiary does not have to now demonstrate dependency on the deceased.
For help and advice on the new worlds of pensions, contact us or call us on 0121 693 0690.