Freedom Day countdown
20 March 2015
Freedom Day countdown is nearly over but will consumers get enough support to make wise choices
There has been much speculation over the last 10 months since George Osborne pressed the pensions equivalent of the nuclear button by calling time on the default of annuity purchase at retirement and giving everyone over 55 the choice to take all their pension savings out in cash.
The whole pensions industry has been trying to understand the short and long-term implications of the seismic changes. Predictions and consumer research findings abound. Third Party Administrator Hyman Robertson calculated that some £6 billion of assets is heading for the one-way exit door between April and July 2015 alone. A more recent Cenuswide consumer survey found some 40% of people were planning to withdraw all or part of their pensions as soon as they are allowed. This chimes with a BlackRock January Investor Pulse survey which found 43% of consumers planning to take some of their pension pot in cash.
The national media has also been gnashing its teeth about a potential boost to already over-inflated house prices as, according to the same Blackrock study, some 17% of retirees are planning to crystallise all of their pension assets in order to move their money into other assets geared to delivering them an income in retirement, notably property.
Others are studying the levels of pension assets being ‘held back’ by Freedom Day. These are the amounts which we know are pending for crystallisation post April 6th. Apparently about £5bn of assets which would ordinarily have gone into annuities already, are currently sitting in the pending (crystallisation) tray. There is conjecture that in the next tax year from April 6th there may be as many as 540,000 pension holders looking to cash out, considerably higher than the Government’s upper level estimates which were 320,000.
If volumes are this large it is unlikely that everyone will make wise financial decisions. We know that many do not have relationships with financial advisers helping them navigate these ever-trickier retirement planning waters. Some will undoubtedly plug them in as they reach the eleventh hour when decisions need to be taken. Others will use guaranteed guidance services provided by Pensions Wise, TPAS and the CAB. These services could be swamped over the next year.
More positively, we are finally seeing some innovative tools emerging for helping advisers and consumers work through retirement planning decision-making. One established retirement planning methodology that we found interesting was Bucketing which is detailed in a study called ‘Retirement planning: Bespoke retirement solutions are the new black in 2015’ by actuarial analyst house Milliman. Bucketing Strategy is currently gaining ground as a good approach for retirement planning.
The idea is break retirement funding into 3 pots. Bucket 1 is for ‘essential spending’ where some guarantees of income are needed. So this might be secured through an annuity and others suggest it might be from a funds held in cash. Bucket 2 is labelled ‘Discretionary Spend’ and this might be held in an even mix of bonds, cash and equities. Then finally Bucket 3 at the apex of the triangle, mirroring Maslow’s Hierarchy of Needs, is designed to build funds for your ‘legacy’.
Clearly as you step from one bucket to the next your attitude to risk can be adjusted upwards. For example for the legacy pot you can afford to take higher risk, perhaps placing money in equities only for example in order to attempt to optimise the legacy you leave over the long-term by exposing it to higher risk and potential higher return asset classes.
At Dunstan Thomas we have been working hard on a number of new pre and at-retirement planning tools designed for use on devices now in wide use – smart phones, tablets and the like. Imago Self Direct, which was soft-launched about nine months ago, now offers a mature pre-retirement tool allowing consumers to run an outcome-based model of how much they need to save to reach a desired income in retirement.
A second tool offers those at-retirement an ability to explore a number of different income mix scenarios including Tax Free Cash, Income Drawdown, Annuity Income, State Pension income, other income (e.g. property rents) and calculate the effect of tax on income. They are designed to provide instant feedback through dynamic infographics and graphs. I’m pleased to say major name D2C platforms are due to commit to start using these tools shortly. We see clear and growing demand for tools which help consumers (and advisers) navigate the new world of pensions post April 6th.
After all as one commentator pointed out all the key risks associated with saving for retirement (and spending your pot once in retirement) are about to be passed back to the consumer come Freedom Day. The risks can be loosely described as:
1. Longevity (how long will I live?)
2. Inflation (how will inflation restrict the spending power of my pot?);
3. Flexibility (am I going to be able to afford that special holiday on our 50th wedding anniversary?)
4. Volatility (what damage could a poor run on stock markets do to the value of my portfolio?); are considerable and complex to calculate.
These risks were previously handed over to product providers, investment managers, administrators, trustees and financial advisers – at a price of course. But increasingly will we see consumers shouldering more key retirement choices decision-making, requiring them to mitigate these risks? If so, we need to provide a lot more routes to financial education. Online tools such as Imago Self Direct are one way of helping consumers make better informed decisions before and during retirement.