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Chris Gilchrist: The terror of pensions


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


isobel Langton, Royal London

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There is one comment at the moment, we would love to hear your opinion too.

  1. Because of the hedonism of the last twenty years, fuelled by the urban myth of spendable home “equity”, and the closure of or reduction in contributions into “forced” saving through employer pensions, people are reaching retirement in increasingly bad shape. And their circumstances are terribly complex. No longer do they have a workplace pension or even any sort of adequate pension pot or savings, and this is added to a precarous debt overhang that, whist covered by fixed assets, looks unrepayable for many.

    I started thinking about how one might codify a computer based pension guidance system, and to be honest I threw in the towel very early on. It is almost impossible to deal with each set of circumstances without incurring mis-advice liability. The only solution is a full on piece of financial planning costing upwards of £1000 – and Joe Punter won’t pay for it. Worse, as Mr Gilchrist points out, giving people a lot of options to deploy what is invariable not an “ample” retirement provision, is simply going to encourage the punters to blow the lot (or little) – because the alternative an income of say £2000pa appears to make pitifully little difference to people’s lives. It’s going to take a tough IFA to stand there and tell to customer that they are too stupid to be entrusted with large(ish) sums of money and that they will be wise to plan for a long, somewhat impoverished journey and not to spunk the whole lot on a car, or to invest it in the latest 10%pa guaranteed* get rich quick scheme. The whole landscape is riddled with liability because, with too little to retire on, and possibly debt overhang, many people are in no fit state to retire. Whatever advice they are given they are inevitably going to think there must have been a better choice and will come back in years to come with a lawyer by their side.

    “Small print: Yeh, right, dream on.

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