Seize the day

February Retirement Strategy

The minimum retirement age will increase from 50 to 55 on April 6, yet nearly half of 45-49-year-olds and two-fifths of 50-54-year-olds are unaware of the change.

With so many apparently unaware of the change, there is a real opportunity for many advisers but the trick is to move fast to make sure clients’ applications are submitted in good time.

Although the changes don’t come into force until April 6, 2010, many life offices and insurance companies recommend that applications are submitted well before this date - in some cases, as soon as March 1.

This is mainly to make sure application forms and monies can be processed in good time to meet the deadline, so it does mean there is some pressure on advisers to get the ball rolling now.

Given that the British postal system is about as predictable as a grumpy teenager, it is worth acting sooner rather than later. All it takes is one application form to get held up or go missing in the post for advisers to end up with some seriously unhappy and potentially out-of-pocket clients.

Some providers now offer online application systems, particularly for annuities, which helps speed up the process and ensures the form reaches its intended destination. An online application arrives much faster than a form sent in the post - so it will be seen sooner and processed earlier.

Opportunity or headache?
Advisers who see the age change as an opportunity to contact clients also stand a good chance of securing additional client reviews and adding value to their clients.

Although some advisers may only have a handful of clients aged 50 to 55, it is still probable that the terms of many pension contracts will include a clause that says clients are allowed to access their pensions from age 50, should they need to. Advisers will also need to explain to clients the potential disadvantages such as the impact on death benefits.

Advisers who move too slowly could miss out on a gilt-edged opportunity to talk about the options available to clients who might want to take their tax-free cash without buying an annuity at the time, possibly using some of the cash to invest in a pension or tax-efficient products but keep working in order to continue paying into their pension.

The essentials
1: Clients under 50 could be thinking about taking benefits from that age. With interest rates on their mortgages possibly lower than in the past, there may be a chance for these clients to pay more into a pension or alternative products - an Isa for example - that would allow access at age 50.
2: Clients aged between 49 and 54 should be made aware of the changes as a matter of urgency. For example, some may want access to their pension commencement lump sum if given the option.
3: Consider how many of these clients can be sure their circumstances will not change in the next five years and that they won’t have any nasty surprises when they try to access their PCLS.
4: Some clients who want access to their PCLS now may want access to potentially more PCLS in the future.

Access to tax-free cash
Extreme care needs to be taken when giving advice to clients who want to access their PCLS but in some circumstances it can be the right thing to do.

As a simple example, consider Gary, who is 50. He’s self-employed and runs a small plumbing company with three workers. He has been hit pretty hard by the recession but he needs to pay his employees and get hold of some additional materials so he can finish a job. But he does have a Sipp worth £400,000.

If he can access his tax-free cash lump sum now, he will have instant access to £100,000 to use so he can finish his current job, pay his workers and continue to trade. When cashflow has improved again, perhaps Gary can make some further contributions back into his pension.

One of the most important legislation changes at A-Day gave people the oppor- tunity to take cash from their pension on a nil income basis. This makes drawdown attractive to many because the risk of withdrawing income at the wrong time is eradicated and especially because some providers now apply a capital guarantee to their fund.

Advice is critical
There are many things that can be done for these clients but it is critical that they do get advice and now is an ideal time for advisers to contact their clients to help guide them through the changes.

With all of this in mind, this legislation change begins looking increasingly like an opportunity knocking. But act now because the deadline is fast approaching.

 

Colin Simmons is business development manager for pensions Prudential

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