If you intend to retire within the next year, then the best course of action may simply be not to, warns John Read.
Chancellor George Osborne made a bold claim in last week’s Budget. “Last year I unlocked pensions with freedom for millions of savers,” he said. Yet the reality is very different. That so-called ‘pensions freedom’ is actually putting chains on those retiring today and only a small minority will cope.
This idealistic concept of ‘pensions freedom’ has thrown the pensions industry into such chaos that it effectively means ‘choice’ is unrealistic. The proclaimed ‘freedoms’ should have been introduced for 2016, when major state pension changes are in place, but the ill-thought out proposals have apparently been rushed through in advance of the General Election.
If you are in a good company or public sector scheme – or entitled to a second state pension, which combined with the basic pension exceeds the value of the new single tier one – you are lucky. Many other pensioners will be better-off deferring their retirement. Even those in a strong position should seek independent financial advice to determine if they should defer retirement, if they can afford to.
The new pensions freedom is based on the principle that those who retire should not be forced to buy an annuity. But it has been introduced before an adequate replacement for annuities has been found, causing considerable confusion. It also risks possible harm to pension provision by allowing pensioners to put their funds into highly risky investments, permitting excessive withdrawals and exposing more of their pension to income tax penalties. Investment and income drawdown schemes can be uncertain and expensive, with charges of 0.6% to 1% or more of fund value per year, with returns no better than level annuities. This could be a jungle best avoided.
The inevitable collapse of the annuities industry is now taking place, with rates falling drastically – they have dropped in recent weeks from 6.5% to 5% for level annuity and from 4% to 2.5% for inflation linked annuities. Every £10,000 of funds will at best yield £500 a year income. There is no justification for this fall in returns other than the market uncertainty created by the Government – and the industry’s use of this uncertainty to increase profits.
Annuities at current rates do not offer value for money. Providers should be able to offer real term returns (inflation linked at 2%) at 7% to 8 %, with charges absorbed by the investment returns on the funds.
Returns on savings are at an all-time low, investment risk is at an all-time high and there are a lot of uncontrolled predators waiting for the chance to steal pensioners’ hard earned retirement savings. Sadly those predators include HMRC, with some commentators speculating that the pensions freedom has been inspired by the desire to cut the Government’s fiscal deficit by increasing the tax take on pension savings, reported from the Budget statement at £500m. Never has it been such a bad and uncertain time to retire.
The ‘pensions freedom’ allows a person to draw funds out at any time after the age of 55 and spend them at will. But pensioners could already take 25% as a tax free lump sum and some could opt to pay 20% to 40% tax to access the balance.
Pensioners are now left with the worry of how to create income sufficient to live on, with independent advice being expensive and not necessarily reliable. Comparison websites also cannot always be trusted. And investment charges on maturity are high, even without converting pension savings into annuities – they will still absorb 1% of the potential return, while pension drawdown charges can be even more costly.
Advisors will have difficulty in being confident with their advice at present because of future regulatory uncertainty and unknowable future personal circumstances. Members of good schemes will find it difficult to do better elsewhere, though it is sensible to explore options. If you are at retirement age, check what you will get. The basic state pension is £115.95 per week and combined with any second pension – or the state pension of a dependent partner – the payment could exceed the new single tier pension, so some people will be best-off retiring now.
People considering retirement should treat advice with caution. Anyone forced by their finances to retire now should establish their minimum living costs. They may then be wise to delay annuity decisions until rates recover or suitable replacements exist, using lump sums to reduce debt and using drawdown as needed.
Fund drawdown at a level of 6% at age 65 would last 16 years (more with investment growth), to age 81; a fund of £75,000 would be needed to raise the single tier pension to the retirement living wage of £12,000. Survival beyond 81 would need some form of equity release drawdown.
There are alternative options on the horizon, but there is much to be said for a regular guaranteed income. The old financial advice adage is ‘if it seems to be good to be true, it probably is’. This applies just as much to government promises of ‘pensions freedom’ as it does to ‘get rich quick’ investment schemes.
Nothing in this blog is intended as personal financial advice. Anyone planning their retirement should seek the highest quality regulated independent financial advice.
