With the advent of pension freedoms now only hours away – and George Osborne and Steve Webb about to be heralded as conquering heroes – it’s worth remembering like all good things in life, the new rules will create both winners and losers.
So who will win from pension freedom?
Those who go into Flexi-access Drawdown (FAD) and take what withdrawals they want, whenever they want to. The old rules with their pesky limits of 120% or 150% GAD are now gone. People can take whatever they want. But watch out for providers’ charges. Ad-hoc withdrawals may mean ad-hoc charges.
Those who want to look after the next generation. The new tax rules on death are appealing if you want to – and think you can – pass on your pension wealth. Die before 75 and the money can cascade down to the next generation tax free. Die after 75 and, ok, it could be taxed, but not if you pass a FAD fund down as income and pass it to those who don’t yet pay income tax.
Those who have relatively small pots. This was one of the first changes to be made last year so it’s easy to be blasé and dismiss it. But remember the days when you had a pot worth £29,999 and you bought an annuity with it which was worth tuppence ha’penny each year? Allowing people to take it all as cash has to be the better option – even if they just blow it on a party.
Those who go for ‘blended options’. Combining annuity with drawdown may be the best option for many people out there. Buy an annuity to cover the essential bills – so together with the state pension – you can cover those costs. Use FAD to invest the rest, and withdraw what you want, when you want. Win-win.
Those who buy an annuity in later retirement. Annuities are still suffering from a bad press and the image of poor value. But the new freedoms mean some will still buy an annuity, just not at 60 or 65 when the ‘return’ appears so bad. Buying an annuity at age 75 or 80 will start to make good financial sense.
And those who will lose out?
Those who get scammed. It could be argued pension freedom is simply legitimising pension scams. All those people out there who can suddenly get their hands on all that money – it’s a scammer’s paradise. And – very sadly - some will lose the lot, despite the best efforts of Pension Wise, the media, and the pensions industry to warn them.
Those who pay excessive tax on their withdrawals.Taking money out of pensions could mean a hefty tax bill. Instead, spreading withdrawals could avoid the pain. This could be especially disappointing if people take out the money, only to then re-invest it somewhere nonsensical, like a bank account.
Those who invest in drawdown but run out of money. These don’t have to be losers. They could be OK with running out of drawdown money and relying on the State in later life. But some might not have envisaged their retirement like that. They could have run out because of poor investment choices, sequencing risk, or just because they lived a lot longer than they expected to.
Those who take a too conservative approach to life. The flip side to running out of money, is to have too much money left over at the end of the lifespan (if your primary objective wasn’t to pass it on to the next generation). This means they may have underspent, and probably not enjoyed life as much as they could have.
Those with defined benefit pension who make the wrong decision to transfer. Whether to transfer defined benefit pensions is a tricky one to call. It depends on many factors. But just basing the decision on the allure of hard cash may be the wrong approach if it leaves the person without a decent income in retirement.
This is just a short list, there will be many other scenarios. We now can sit back and see how it all pans out. But I hope very much there will be more winners than losers.