The new rules have prompted the emergence of alternative investment solutions to solve the conundrum of how to provide some certainty over income and the necessary longevity of the fund.
Multi-asset funds can invest in a broader range of assets to provide an income and thus beat the rates available on annuities, for instance, which have to provide expensive guarantees. The key disadvantage is that they are relatively expensive unless passive funds are used, especially where they employ single-asset managers or buy into a range of underlying single-assets-class funds, meaning two layers of management charges.
Alternatively, periodic purchases of fixed-term income annuities could provide income, leaving the remainder of the fund invested and solely focused on growth.
Drawdown offers investors full flexibility over how they withdraw from their funds. They can take regular income, occasional larger ad hoc payments, or even choose to withdraw the full fund, although investors should understand the consequences as all withdrawals are taxed as income.
While drawdown can be used by investors to provide income, it is also useful for those looking to continue growing their investments and to pass on funds on their death. The new rules mean that specific assets can be passed on to beneficiaries, without entering the investor’s estate, providing a tax-efficient solution for those with larger estates.
Paul Evans is pensions technical manager at Suffolk Life
EXPERT VIEW
Jeremy Roberts, head of UK retail sales at BlackRock, on the potential for retirees to make the wrong decision on what to do with their pension pots:
“Given the extra flexibility and the opportunity [for retirees] to take a tax-free lump sum, there is [concern over the] possibility that it will be used for short-term issues.
“Of course, it’s human nature to focus on the issues of today rather than those 10, 20 or 30 years in the future. But when we’re all living longer we have to try to focus on the longer term. It is possible that some will use that tax-free lump sum for other uses apart from longer-term savings.”
