Advisers probably complain regularly to their clients about unnecessary legislation. And our initial response to the Budget’s simplification of pensions was a mighty cheer. But the more you think about it, the more worried we ought to be about life in the new landscape after 2015.
The problem is while the rules are simple, people’s lives are not. Our typical client will have enough in defined-c0ntribution/personal pension funds by age 55-60 that they want to plan ahead. And that is where the problems begin.
Most people will have a target for their retirement but the trend is for this to be less and less fixed. How long people work and to what extent are both subject to revision.
That in turn means the dates when they need to start drawing money, and the amounts of money they need to draw, are also fluid. Instead of being a cliff-edge, retirement is in danger of becoming one of those funfair rides where you whizz backwards, forwards and sideways.
For example, it might become common for men now aged 60 to consider deferring the state pension and drawing from their pension fund for a few years until they start taking the state pension, maximising tax-free withdrawals. But if you become ill, or your spouse dies, you might want to draw the state pension as soon as you can.
If you have a couple where both are working in their late 50s the combined options on “when?” and “how much?” are likely to throw up a raft of tax planning possibilities that could turn into tax-paying realities unless they are regularly revised.
This is great for advisers who can deliver service propositions with genuine advice reviews. Clients with such issues, where a few judicious decisions could save thousands in income tax, are unlikely to question their adviser’s fees. But as far as delivering good investment outcomes is concerned, the freedom of the new rules presents serious threats. Few clients will have the capital to be able to draw what they want when they want. Most will ask: “How much can I safely draw each year?” Our answer: “It depends”, will need to be quantified. And if our solutions deliver bad outcomes…
Cashflow planning advocates can wave their flags now, and I do not argue with the utility of models and illustrations. But at the end of the day, the safe rate of withdrawals will not depend on planning models but on investment strategies.
My former journalistic colleague Douglas Moffitt has created the ideal portfolio for people with ample capital. His Rising Income Retirement Portfolio – UK equities yielding over 4 per cent with scope for inflation-beating increases – has indeed beaten inflation over several years. But if withdrawals exceed the natural income, the risks can be very high and hard to predict.
The search for “safer” income-generating solutions is on. In the old days, that would have meant bonds; today, it means algorithms and derivatives. What price this insurance, and how good is it?
Chris Gilchrist is director of Fiveways Financial Planning, a contributing author to Taxbriefs Advantage and edits The IRS Report