Three years into to new pension freedom legislation, its interesting to see how the market has changed and how consumer take their benefits in retirement.
What is Pension Freedoms
Naturally Pension Freedoms expanded your options on how you take your benefits in retirement. To explain the options generally, excluding final salary/defined benefit arrangements, your path splits in two. You either give up your benefits/pot of money in exchange for an income for life, what we call an annuity. Alternatively you choose to draw on your benefits through retirement as and when necessary. Of course there is a multitude of options in between from building in guarantees and escalation in to your annuity and opting to only take tax free cash from your drawdown plan, a subject that surely warrants seeking pension advice.
In world of low interest rates, its surprising to hear just over £8 billion was bought in annuities with 52% of these being with the same provider without seeking pension advice suggesting some may now be shopping around for the most attractive rate. When it comes to securing an annuity (guaranteed annuity rates & GMP aside) you have a wealth of potential options available to you from guaranteed periods, spouse payments to escalation. A good pension tip, shopping around could source a more attractive rate, when you consider that once you agree to an annuity, its set in stone. This really is where you should be investing your time!
Interestingly, only 60% of people in drawdown seek pension advice. This creates its own concern (of course an adviser would say such a thing…). statistics show that 33% of these are invested in cash or cash based assets, but why is cash such a problem? Sustainability! The biggest issue with retirement planning is you don’t know how long you will need an income for. Hearing people live beyond 100 is not uncommon now with medical advances and focus on healthy living. So this means that pension pot needs to sustain yourself on the expectation you may well live beyond 100. Of course cash is not going to be working, eroded by charges resulting in an inventible decline in value. I think you understand where I’m going with this. However, none of this is to say de-risking is inappropriate. As you come to rely on your pension, your capacity for loss is significantly hindered meaning there may be an essential need to de-risk the strategy, but this doesn’t necessarily mean cash. This is where pension advice can come in and provide a suitable and effective strategy through retirement.
Another concern research shows is the high proportion of people drawing funds from the pension just to move savings elsewhere predominately due to a lack of trust in pensions. However with the pension being a trust, it falls outside of your estate for inheritance tax purposes, not to mention the tax free growth you receive within a pension!
You have in essence been planning for this date your whole life. To not seek pension advice at this point could define how your retirement plays out. Seek an independent view, speak with a financial adviser!