Last week's article concerned a report by Barclays Bank on the number of over-50s starting their own business. The good news for advisers is that the owners of small businesses are likely to be just the sort of people who will truly value advice – even more so, perhaps, where the owner is of relatively advanced years Before looking at some of the key issues on which advice might be required, it is worth considering one factor which may persuade many over-50s to start their own business. This is the inadequacy and/or inappropriateness of retirement provision.
Inadequacy speaks for itself and is a national malaise which current initiatives such as stakeholder pensions are seeking to address. Another impediment to long-term saving through pensions may well be the format of benefits that emerge from traditional approved pension arrangements.
The pension may come in the form of an annuity or income drawdown but, either way, it is still income. The fact that only part of the fund can be taken as cash may be discouraging would-be investors from putting more into traditional approved pensions.
Moves have been made to expand the choices as to how the funds built up inside pension arrangements can be used to provide more flexible benefits at retirement. It was with this in mind that the Retirement Choices Working Party was commissioned by the actuarial profession in March 2000 to examine retirement income options and to consider how these can be broadened and greater flexibility achieved.
The working party has recently published a report which states that a wider choice of retirement options is required to meet the varying needs of savers. It believes a range of products should be available so that individuals can choose the product or combination of products that best meets their needs.
The working party has identified seven areas that someone converting a retirement fund into income will need to consider. These are:
Choice – can options be tailored to meet varying needs?
Security – the extent of risk involved.
Inheritability – what happens to the remaining retirement fund on death?
Flexibility – can a chosen option be changed?
Self-reliance – will the option prevent a reliance on state support?
Investment efficiency – what type of investments are involved and will they benefit from equity investment growth?
Cost effectiveness – is the option expensive to run?
It is the working party's view that different people will attach different priorities to each of these criteria. I have to say it is hard to disagree with this conclusion. Consequently, there should be available a range of retirement products which provide the choices required by savers.
Some priorities are not catered for adequately in the existing products which can be provided within current pension legislation. The working party believes this highlights the need to examine ways in which the legislation should be changed to widen the choice available and to better meet these needs.
To demonstrate the ways in which different products cater for these priorities, the working party has examined four methods of providing retirement income, including some which are not available currently. These cover:
Extended annuity options including some recent annuity product developments.
The proposals in the Choices report issued in March 2000 (see below) in which a minimum index-linked annuity would be purchased at retirement with freedom to invest and draw income from the balance of the retirement fund.
The personal distribution plan – a proposal developed in the current report in which there would be no compulsion to buy an annuity at retirement. The retirement fund could be invested and drawn from without restriction but an annuity would have to be purchased at latest when the fund reached a level at which it could only secure the minimum income an individual requires (including state benefits) to maintain a satisfactory standard of living.
Special interest is being shown by the press and other interested parties in the principles underlying the last option. We have already seen the Choices report of the Retirement Income Working Party, chaired by Dr Oonagh MacDonald, which suggested alternatives to compulsory annuitisation in respect of approved pension arrangements.
Given the significant value of pension funds in the UK, this is clearly an issue of overwhelming importance. But those still saving for the future who are disaffected with the current range of pension choices and who are insufficiently confident that enough change will be introduced in sufficient time should give some thought to the alternatives currently available.
Even leaving aside Isas (which you should not, at least from a tax standpoint), and especially with the capital gains tax regime as it currently stands, serious consideration deserves to be given to the tax attraction of growth-orientated collectives to produce completely accessible, unconstrained and at least tax-effective and at best tax-free funds.