With only December’s Autumn Statement finally confirming full details of the new pension flexibilities, it is hardly surprising product providers are struggling to bring anything new to market by 6 April.
There are indeed suggestions many are delaying any launch until they see what the opposition is doing. As a result, it will be a difficult time for advisers and their clients.
While some will be blaming the companies themselves for the delay, I feel we need to offer a level of sympathy in this regard. Even if the new rules had been clearer at the time of the Budget last year, timescales for the launch of new products would have been exceptionally tight. With the changes being so radical, there will be a need to ensure administration systems can cope with the new flexibilities on top of the usual product testing in the marketplace.
However, as we are all too aware, none of the technical background to the changes came out at the time of the Budget. The changes to death benefits, for example, were only confirmed in detail in December, leaving just a few months to come up with new products and services.
Certainly, the expectation is that we may not see some products for at least another six months, while others could potentially be up to 18 months in production. How do you advise clients on the best way forward when the perfect product could be just around the corner or may never, in fact, materialise?
Even when we start to see products on the market, who is to say the first one launched will be the best? Should you really be putting a client into a product without considering anything else that may be on the way? It could be another provider has something very similar planned but with a few more bells and whistles or at a lower overall cost. It really is going to be a minefield.
The new levels of flexibility available following last year’s Budget may well be the saviour for advisers and clients in the shorter term. It will give advisers the opportunity to suggest clients maintain the level of income required to keep them ticking over while keeping their longer-term planning options open to change. The use of uncrystallised funds, pension lump sums and/or flexi-access drawdown to give tranches of income and capital while leaving most of the pension untouched is going to be a necessary route trodden by many wary advisers in the next few months. Part of this advice process will be to educate clients on the current market and political position, and the vagaries present in trying to tie down a long-term plan.
We have seen change after change in pension legislation since “simplification” came upon us in April 2006. In some years since, these changes have taken place at least twice annually – following on from a Budget or an Autumn Statement. In the past nine months or so we have seen announcements at various stages and it has been important to keep our eyes peeled so as not to miss anything.
For those advisers who, at the time pension simplification came in, thought the level of simplicity was going to do them out of a job because everyone would understand how pensions worked, the ensuing raft of changes has been something of a pleasant surprise. I have no doubt clients are more confused now than they have ever been when it comes to structuring retirement income.
Sadly, part of the current confusion rests in the fact that we have a general election around the corner. A new government could decide to make further changes to pensions and force advisers into an embarrassing U-turn or – at the very least – onto a new path.
We are aware the Labour Party has said it wishes to review the effect of changes in the pension death benefit rules on income to the Exchequer and there is no doubt such a review would take place in the event of a Labour government.
With one of the main benefits of the recent changes being the ability to pass pensions on to future generations, it would seem foolhardy to embark on some form of estate planning involving pensions until the dust has settled after the polls in May… and after a likely emergency Budget following that.
So, in most cases, a wait-and-see approach will be the order of the day. The right advice will probably be to do as little as possible for the time being. The challenge is most likely going to be to ensure clients do not make any rash decisions before we get a level of clarity. How quickly that clarity will surface is anybody’s guess.
Andy James is head of retirement planning at Towry