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Nic Cicutti: Osborne blows hole in the advice system

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Over the next few months I will be officially ‘retiring’. Don’t get your hopes up, dear reader: what I will actually be doing is consolidating the many different personal pensions I have paid into over the past few decades.

Thereafter, the plan is to take the 25 per cent tax-free lump sum and use it towards building an extension to our property. The rest will be invested via a drawdown arrangement until I am ready to take a proper pension income, hopefully many years from now.

The lump sum will also still be ‘invested’, in more ways than one. Talking to architects and local estate agents has helped us realise that, given our location, a larger property on our plot can command a stratospherically better price should we ever decide to downsize.

Which means the house fire we suffered late last year has given us a much-needed opportunity to improve our home beyond the basic reinstatement paid for by our insurer.

The challenge was always where to find the money for this work.

In addition to various pensions, both occupational and private, I have also saved into Isas and their Pep predecessors over the years. We always intended that about one third of our overall retirement income should come from Isas.

Initially, it seemed easier to just cash in one or two of the anomalous Isas, like the former £3,000 single company Pep whose value, as of last Friday’s close, has risen five-fold (with reinvested dividends) since April 1999. Or a far less successful FTSE All-Share Isa/Pep taken out in 1998.

But the continuing income potential of Isas, in many respects, means that while we consolidate and review all our investments my personal pensions will now become less important as sources of long-term retirement income.

To some extent, George Osborne’s Budget speech the other day, while introducing few new factors to our decision, did at least confirm its trajectory.

His announcement that from April 2015 anyone over the age of 55 may take their entire pension pot as cash, subject to tax at the marginal rate, while also increasing the overall trivial commutation limit from £18,000 to £30,000, has effectively sounded the death knell for old-style annuities.

What is striking about Osborne’s announcement is that while Steve Webb spent the best part of the past year prattling on endlessly about reforms to the annuity market, the Chancellor chose to make them irrelevant instead.

It seems clear that, faced with a market incapable of offering a fair deal to retirees, reluctant to allow savers to access a genuine open market option – and a tardy regulator incapable of enforcing the most basic requirement for providers to treat their customers fairly – Osborne simply decided to dynamite the product itself.

Yet, as Annuity Line head of business development Billy Burrows said on the Money Marketing website last week, it does not mean annuities are dead and buried. They will continue to guarantee an income in retirement, essential for hundreds of thousands of retirees expecting to live longer than people have ever done before.

To many people, this secure income option will always be the most important consideration: the Financial Times’ Lex column pointed out that in the US it is not compulsory to buy an annuity but $220bn (more than £130bn) of them were sold in 2012.

As annuity levels increase along with rising interest rates, they will remain a more attractive option to those who prefer security of income to other uncertain alternatives.

And Billy may be right in saying that “by taking away the burden of the small pots the industry will able to focus on providing better value and more choice for those with larger pension funds”.

But I can’t help feeling that the cashing-in of pension lump sums will not split evenly between those with small and large lump sums, as he implies.

Current savers’ average pension pots were variously estimated at between £17,700 and £30,000 in newspapers last week, suggesting that many who could have commuted some or all of their available lump sums chose not to do so. If so, insurers will not feel as compelled to compete for those smaller sums.

Besides, the overall decline in numbers of those taking out annuities will affect companies’ ability to pool risk, leading to increased adverse selection and poorer-value annuities for those with no impaired life options available to them.

My biggest concern is over the absence of an advice structure whereby those who want to make an informed decision about whether they should cash in their pensions.

I heard Steve Webb on the BBC at the weekend talking about how everyone will receive free face-to-face guidance at the point of retirement, kickstarted by up to £20m of government funds.

Webb must know this sum is far too small for upwards of 400,000 retirees a year to receive a detailed analysis of their needs and the next steps they should take. For those with small lump sums, this advice could potentially cost an impossibly large chunk of their money.

Those of us able to make reasonably informed decisions will be able to work our way round the Chancellor’s annuity announcement. Unless the Government improves its help to those who will need advice, I fear George Osborne’s legacy will be more uncertainty and smaller pensions.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. In many ways I agree with you Nic but I have a fundamental problem with the budget changes. Nest for example is intended to provide a retirement income but this is not really true now. You can access it at 55 far beyond most people’s practical retirement age yet I cannot get my head around why it should not be 54 or 53 or 49 for the very reason you give.
    It cannot be fair that clients are lumbered with debt at say 53 paying rolled up interest say on that debt and have to wait 18 months to access the pension. This is a poor financial situation which the Co-op have had to make provision for in the additional £400m they wish to find – it was not always in the interest of clients who had mortgages to roll over interest but to walk away from the mortgage. We have two clients at the moment who are lumbered with debt and would like to be 55 rather than 52!

  2. I too have a problem with these changes. Choices are a rich persons luxury but the rich are not the problem. The poor have conflicting needs alongside simple temptation and the practical reality is that for the majority of individuals retiring in a few years time with a nest pot and little else, one of those competing needs or wants will seem far more important, especially with a void of advice. Many of those individuals will be living in rented accommodation and receiving housing benefit and council tax benefit.. Surely the point of Nest was to reduce future benefit dependency but this change will mean that the extra tax that Osbourne generates from this change will reduce this generations debts but will be paid for by future generations in increased benefit payments for people who should be receiving pensions.

  3. I believe that the chancellors budget is generally a good thing for the majority of ‘MY’ clients. I say ‘MY’ clients because they are clearly people who are currently getting and value financial advice. All that the chancellor did was give me and my clients more options and when you have someone that knows what they are doing more options is a good thing. I also think that the mass-medias sudden realisation that annuities are no longer the default option they believed them to be will lead more of the public to believe that it is worth taking advice at retirement. Always a good thing for the adviser community.

    However, the negative aspects of the budget changes will be felt by those who are either unwilling or unable to find/take financial advice. The reason behind this is that the changes allow the public to make a potentially catastrophic decision at age 55. For all the negative aspects of pensions the rather strict rules about what you can do with 75% of your fund forced you to take an income and therefore lower the risk of you running out of funds half way through your retirement. What the chancellor has done is remove that fail safe.

    Please don’t misunderstand me, i don’t think the changes are 100% good or 100% bad. What i do think is that those who can take advice or know enough to do it themselves will be better off those that can’t have a bigger risk of being worse off. Basically the real winners were financial advisers, more options means more people wanting help to understand them.

    All the above is my humble opinion obviously, feel free to disagree.

  4. If the £20m suggested to give people advice is spread amongst the 400,000 retirees It would be £50 a pop. Enough for 20 mins at £150 per hour.

    and who will give the advice? the 15,000 advisers who have recently left the industry maybe?

  5. The impact of these changes are grossly over estimated.

    Nest says there are 420,000 retirees with decisions to make over their average pension fund of £20,000.

    A quick look at pensionpolicyinstitute.com shows pension funds are in slow but steady decline.

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