Below are some of the most common responses that people give when asked about their views on pensions:
‘That’s ages away, I’m only young’
‘I’ve worked all my life and paid my full stamps so I’ll get the full state pension’
‘My business is my pension’
‘I’ve got buy-to-let houses that will provide me with an income’
Whilst some of these may well be true, what is apparent is that there is a varying degree of knowledge of pensions; both products and terminology and given that pensions are changing rapidly following last year’s Budget and Autumn Statement this is a concern. This lack of knowledge and awareness isn’t surprising, given the array of complication and changes that the pension market has undergone over the last 20 to 30 years. The Channel 4 Dispatches programme ‘How to blow your pension’, which aired on Monday 12 January 2015, perhaps raised more questions than answers.
Given the new pension freedoms being introduced in April, it is important that people begin to understand how to make their pension savings work for them. The government wants to put people in charge of their own financial affairs, but there are some vital considerations to make if many individuals want to maintain their lifestyle in retirement, including tax implications, life expectancy and the solutions that are most likely to suit their needs.
The International Longevity Centre-UK (ILC-UK), an independent think tank dedicated to addressing issues of longevity, ageing and population change, has produced a report following a major consumer research project. From a nationally representative poll of 5000 people aged between 55 and 70, who are yet to retire or draw on their private pension, the results make interesting reading.
Nearly 70% of those with a defined contribution pension (the most likely to be impacted by the new pension freedoms) said that they would prefer their pension to deliver a secure, guaranteed income for life. This seems straightforward enough an objective, but when the average pension fund is in the region of £35,000, how will many people continue to pay the household bills when living into old age, never mind enjoying a comfortable standard of living?
It’s clear that planning early and regularly reviewing your plans is becoming increasingly important, but do most people know enough to make an informed decision about retirement plans?
50% of those surveyed said they understood, quite or very well, what an annuity is and 35% understood what income drawdown is. This compares to over 90% who said that they understood what a mortgage is. As the government wishes to put the onus on the individual being able to make a decision in their own right, this could result in some poor decisions being made and making the wrong one could result in a big shortfall during retirement, especially when considering increasing life expectancy.
In the survey, men underestimated their life expectancy by between 4.2 and 5.5 years and women by between 5.6 and 6.3 years. No-one knows how long they will live of course, but planning this incorrectly may result in overspending in the early years of retirement, leaving a potential shortfall later on.
What about tax?
The survey results indicated that one in ten thought withdrawing all their pension savings in one lump sum would limit the tax burden, as opposed the 90% who correctly identified that it is generally more tax efficient to withdraw small amounts over a number of years, thereby spreading the tax liability, or possibly negating it altogether depending upon personal circumstances.
All this underpins the government’s initiative to offer free and impartial guidance, but guidance alone may not be enough for many people to be able to make an informed decision on how best to use their pension savings. After all, guidance is not advice and a half hour consultation is unlikely to provide sufficient information to allow most individuals to reach a definitive conclusion on such an important matter.
As a firm of independent financial advisers, we were reassured to see that using a professional financial adviser was the first place that most respondents said they would go to seek advice. We are experienced at dealing with retirement planning issues and fully up to speed with the forthcoming changes.
Our usual process is to arrange an initial meeting which we will not charge for. This enables our Financial Planning Consultants to establish your needs and objectives and make an assessment of the work required, including any on-going work. We will explain what costs will be payable for our advice and services, but will not charge until we have agreed with you how much and how we are to be paid.
Please get in touch at any of our 15 office locations across the North of England and South of Scotland.
