Almost three months on from the April pension changes and the dust is starting to settle. Providers are now mostly clear on what is being offered to customers.
Most advisers who specialise in this area will have a good sense of whether their model will work in the new regime or whether it needs tweaking. And with Baroness (Ros) Altmann in place as the new pensions minister we can be sure as an industry that the government will maintain a relentless focus on the outcome for our customers.
Recently, we have noticed several broad trends among clients, some more surprising than others.
Firstly, and least surprisingly, those with modest pension pots of up to £30,000 are opting to cash them in, rather than take an income.
Normally this should be a simple process with not much of a requirement for financial advice.
But the rush to cash in pension pots has caused some hiccups along the way. Despite the availability of the government’s Pension Wise service, we are still seeing many over-55s misunderstanding the implications of the freedoms for their tax liabilities. This issue is coming up time and again, regardless of the size of peoples’ pension savings.
For example, if the provider has not received the most up-to-date P45 from a client, they may default to using the emergency tax code, meaning the client may be faced with a larger-than-expected tax bill.
It becomes even more complicated for those clients over the age of 55 who wish to access their pension pot while still working – which is a substantial proportion.
The taxable element of any extra income from their savings can push some individuals into a higher marginal rate of tax. This unwanted side-effect can often be mitigated by spreading out withdrawals over time.
There is a role here for guidance and potentially even advice on this issue, particularly for customers with larger savings or multiple pension pots. Whether the client releases his savings over a number of years using drawdown, uncrystallised fund pension lump sums or fixed-term annuities can make a very significant difference to how much he gets from the savings, fully justifying the advice fee in many cases.
Ahead of the changes, we had an expectation that those with more mid-range pension pots would opt for guidance rather than the advised route.
But many customers with pots of this size are also benefiting from advice.
One such client, for example, asked how best to use her fairly modest pension pot (£62,000). An ex-teacher, she received around £11,000 a year from the Teachers’ Pension Scheme, but she wanted to release some cash for a holiday, and to supplement her income until she reached the state retirement age of 66 – when she would gain additional income.
In this case, advice allowed the client to plan her retirement in stages. She used the 25 per cent tax-free cash allowance to fund her holiday, and it was recommended that she used the remaining £46,500 to buy a fixed-term annuity to take her up to the state retirement age.
