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Mark Pearson: Retirement income planning for the middle market

Retirement income planning for the middle market

Mark Pearson MM blog

As money purchase pension provision spreads, more retirement savers will be faced with the question of what to do with their fund at retirement.

Retirement is no longer a fixed date but can mean different things to different people.

Currently the statutory minimum retirement age, the age at which most people can crystallise their pension funds, is 55. There is no maximum age at which pensions must be crystallised, although those over 75 will crystallise at some stage, if only to secure their pension commencement lump sum.

State pension age will gradually be stretched out to 68 and future regular reviews may well see that extended further.

Private planning for retirement has become even more crucial in order to have choose when and how our working lives end.

Following changes in legislation, options at retirement for those with money purchase funds, are much more flexible than they have been in the past. Wider options are clearly good for the individual but the decision process becomes more complicated, increasing the need for advice.

Recent investment markets and interest rates have resulted in annuities being portrayed as poor value for money. However, at the other extreme, the same factors have restricted the level of income that an individual can take from a drawdown pension.

In terms of drawdown pensions, the Government has tried to address this by introducing flexible drawdown and in the draft Finance Bill 2013, provision for the maximum capped drawdown to increase from 100 per cent of the Government Actuary’s Department rate to 120 per cent.

In so far as annuities are concerned, whilst investment yields remain low rates show no sign of improvement. If we add to this other factors, such as the introduction of unisex rates, improving mortality and less annuity providers competing for business, one could be forgiven for looking on the bleak side.

For many people without significant funds accumulated during their working lifetimes and who may not have made alternative provision to maintain their lifestyle, the relative security of an annuity may remain the most appropriate option. To that extent a known income with which to budget may well offer “value for money” in those terms.

Others who have accumulated both more significant retirement savings and personal wealth may be able to take the risks that are inherent in a drawdown strategy. Indeed, flexible drawdown offers the greatest degree of flexibility for those who want and can afford to go, as it were, “a la carte” with their pension savings.

Important planning issues remain for those in the middle ground needing some security, are prepared and can afford to accept some risk and it is appropriate to provide some flexibility with some of their funds. These savers may need advice and polarising the options does not necessarily result in the best outcome.

For these individuals, planning should start with ensuring that essential living costs are provided for and ultimately planning which diversifies their pension income sources could provide the answer.

Mark Pearson is director of business development at Origen Financial Services

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Comments

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  1. What a load of tosh. Annuities represent poor value for money, the government refuses to come up with any sort of meaningful proposals to improve matters and Income DrawDown is high risk, high maintenance, expensive and widely considered to be appropriate only for those with funds of £150,000 or more and at least as much again in unfettered investments. The fact that unspent funds in retirement are subject to a 55% death tax hardly helps either, does it?

    The whole framework needs to be rethought and restructured from scratch instead of the government’s incessant tinkering and meddling, the result of which has been to drive public confidence in retirement saving to the lowest it’s ever been. Would that the politicians and policy makers could see this and take meaningful action to put things to rights. It might help also if we had a pensions minister who’s something more than just a glove puppet for Treasury policy.

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