CHANGES IN THE FINANCIAL PLANNING LANDSCAPE
Since the introduction of the new pension rules in April, pension savers have been taking out around £27 million a day from their pots, according to the Association of British Insurers (ABI). Most commentators agree that there has been no rush to buy Maserati’s or to take world cruises, it seems that retirees are exercising more prudence in planning for their financial futures. Many are aware that they could face large tax bills if they withdraw more than their 25% tax–free entitlement.
The ABI figures covering April, May and June, show that £1.3 billion was paid out in cash lump sums, with an average payment size of just under £15,000. Around 264,000 income draw-down payments were made and some £990 million was invested in 17,800 annuities.
Annuities still have a role to play
Although annuity sales have dipped, they still have a part to play in retirement planning. One of their main benefits is security. In exchange for the purchase price, you receive a pre-agreed, fixed income for life. Unlike other retirement income products (with the exception of investment-linked annuities) you aren’t exposed to stock market risk which could erode your income.
Annuities have undergone changes designed to make them more attractive and relevant to market needs. You can, for instance, purchase guarantees that ensure payments are made for as long as 30 years, irrespective of when you die. Guarantees come at a price, the longer your guarantee period the lower your income will be; but for many retirees security is worth paying for.
Taking a long-term view
A key issue highlighted by the ability to take a pension from 55, is the need to plan for a potentially longer period spent in retirement. With more and more people set to live to 100, increasing life expectancy needs to be factored into everyone’s plans. Figures from the Office of National Statistics show that at least one woman in three aged 60 in England and Wales will reach 90, as will 20% of men aged 60.
Inheritance tax planning
Under the new rules, money held in defined contribution pensions does not form part of your estate when you die, meaning your beneficiaries inherit your pension money free of Inheritance Tax (IHT). With IHT payable at 40% on assets over the current £325,000 threshold, this provides a welcome opportunity for families to pass wealth down the generations tax efficiently. Taking professional advice will help ensure that whatever age you are, you make adequate provision for a long and comfortable retirement for you and your family.
The value of the investment can go down as well as up and you may not get back as much as you put in.