Golden rules for healthy nest eggs
With retirement options complex and rules in constant flux, it’s not easy making wise pension choices, writes Stephanie Hawthorne.
The bedrock of all retirement provision is the state pension. When it was first introduced in 1908 for people aged over 70, only a few individuals lived much beyond that age, yet a baby girl born in 2017 can expect to reach 94 years and a boy to live until 91.
With this in mind, the Cridland independent review of the state pension age in March recommended that the state pension age rise to 68 by 2039 instead of 2046. So, anyone aged under 45 today may have to wait until they are at least 68 before getting a state pension. This could affect around 5.8m people. A recent report by the Government Actuary’s Department points to a state pension age of 70 for anyone born after 6 April 1986 (those aged 30 or younger today).
Tom McPhail, head of retirement policy at Hargreaves Lansdown, comments: “This report is going to be particularly unwelcome for anyone in their early 40s, as they are now likely to see their state pension age pushed back another year. For those in their 30s and younger, it reinforces the expectation of a state pension from age 70, which means an extra two years of work. This report also looks like the death knell for the state pension triple lock.”
Cridland also recommends that the triple lock guarantee (which protects state pension increases) be abolished in the next Parliament and that there should be the option of part-deferral of state pension and a mid-life MOT to help people plan for later life, to be delivered by employers and the National Careers Service. The proposals around a mid-life MOT, employment opportunities for older workers and split deferral of the state pension should all help to extend working lives.
Maike Currie, investment director for personal investing at Fidelity International, says: “Sensibly, Cridland has been keen to avoid a repeat of the WASPI (Women Against State Pension Inequality) protest by recommending that future rises should take place only once a decade and be notified 10 years in advance.”
Malcolm McLean, senior consultant at Barnett Waddingham, points out: “Longer lifespans overall do not necessarily equate to longer working life ability and we should accept that for some people a state pension age of 70 or beyond will mean they will not live long enough to draw their state pension – despite years of contributing to the system from their national insurance contributions.”
Freedom and choice
Hundreds of thousands of savers have cashed in £9.2bn from their pension pots since the government’s pension freedoms were introduced in April 2015. Over 1.5m payments have been made using pension freedoms, with 162,000 people accessing £1.56bn flexibly from their pension pots over the last quarter, according to the HMRC.
Not all the over 55s are using their money wisely. Retirement Advantage research shows that 28 per cent spent the cash on home improvements; 26 per cent put the money in a savings account while 19 per cent invested the money elsewhere; 19 per cent went on holiday; 13 per cent bought a new car and 12 per cent paid off their mortgage or other debts. (Some respondents did two or more things.)
The main downsides are the tax traps and need for financial advice. The chief executive of TPAS, Michelle Cracknell, is worried about “the increase in non-advised drawdown sales in that the customer may not be aware of the ongoing maintenance that these products need”.
Where the safeguarded benefits in a scheme are above £30,000 in value, it is a legal requirement for the investor to obtain appropriate independent advice before transferring those assets into a more flexible scheme. Below that threshold, independent advice is not required, and Cracknell says this is “…creating a market failure, where customers cannot obtain or are not prepared to pay for the advice”.
She adds: “The taxation of pension pots is complicated with money purchase annual allowance, salary sacrifice, taper allowance, lifetime allowance etc. We regularly have customers who would be considered as financially capable who are unaware of one or more of these levers.”
This is an excerpt but you can read the full article in the June 2017 edition of CA Magazine.