How did pension freedoms change our approach to retirement?
Since the reforms were introduced in 2015, clients can have a flexible retirement income strategy that is suitable for them. They also have the advantage of passing their pension assets down through the generations free from inheritance tax. This has given advisers a great opportunity to provide their clients with a holistic plan, which covers both their accumulation and decumulation needs.
Recent data from HM Revenue & Customs (HMRC) shows that since the rollout of pension freedoms, a total of £17.5bn has been withdrawn from defined contribution (DC) pensions. The table below shows there has been, in most quarters, a steady increase in the number of payments and the number of individuals accessing their pensions flexibly.
These statistics suggest the need for advice in this market is growing.
The post-pension freedoms environment has also created potential pitfalls for clients to avoid.
These include the lifetime allowance at £1.03m and the annual allowance of £40,000 plus any carry forward.
There is also possible exposure to the money purchase annual allowance to consider, as well as the tapered annual allowance.
For those clients that could be affected advice will be key, especially if they receive any other income.
What are clients and advisers telling us?
With that in mind, Sanlam recently worked with Cicero research group to find out how the retirement income market has changed, and it revealed some interesting insights:
• Clients and their advisers start talking about funding retirement much earlier than before, with 56 per cent of clients discussing it before their mid-40s. Prior to pension freedoms, only 28 per cent of people discussed their retirement income before age 50.
• Flexibility is key, with advisers reporting that 79 per cent of clients who have some idea of what they desire from a retirement solution are demanding this. Over a quarter of advisers say their clients are looking for flexibility when accessing their retirement income.
• Most clients want a multi-faceted rather than a 'one-size-fits-all' approach to the management of their retirement funds, yet 42 per cent of advisers still take a single approach to retirement income, despite this being potentially unsuitable.
• When planning for retirement, advisers said that, on average, they will consider a client’s full range of assets for four in five of their clients.
• The value of the retirement pot is important when looking at a holistic approach. For pots over £250,000, a more tailored approach needs to be taken.
• Over three-quarters (78 per cent) of advisers would consider drawdown for clients with less than £50,000. This is notably higher than the 69 per cent reported in 2015.
• Although annuity rates are still seen as poor value, both clients and advisers agree the guaranteed income provided is an important part of a multi-faceted approach when providing a sustainable income and capital for the future.
The overriding theme is that clients want to be involved in the decision-making process. They also want advice tailored to their circumstances, and are looking for a multi-faceted approach when it comes to funding their retirement.