The Sixties song Little Boxes is a political satire about the development of suburbia and associated middle-class conformity. It refers to suburban swathe housing as “little boxes” of different colours “all made out of ticky-tacky”, and which “all look just the same”.
I wonder if the writer would have viewed our defined contribution retirement regime similarly before the recent Budget announcement.
Those with little saved had triviality and the wealthy had flexible drawdown. However, for the middle sector, options were limited. Either be boxed into buying an annuity in a market said by the Chancellor to be neither competitive nor innovative and giving some consumers a poor deal. Alternatively, the option of capped drawdown but boxed in by the state dictating what you could take and when, with total uncertainty on how that might change year by year.
Arguably, even advice got constrained by these boxes. While travelling the country, I have been posing a question. Assume a client approaches retirement with £50,000 and it is all in a pension plan. Many have said this is not sufficient for drawdown so advice would often be to buy an annuity. Then I say imagine the same client with the same £50,000, only this time it is not in a pension but in an Isa.
How many times would you advise that client to buy a purchased life annuity with the Isa money? The answer is virtually never.
Same client, same money, same retirement yet a diametrically opposed outcome where the pension box is dealt with one way, the Isa box another way. I am not criticising, simply observing that somehow over the years, the regime seems to have got decumulation planning polarised into dealing very differently with “pension boxes” and “non-pension boxes”. Yet, in essence, they are all just clumps of money to be managed throughout retirement.
Now, as a tax geek, this is where I get excited because to me the recent pension announcements are not just a change to pensions but are far more wide-reaching, in they should breathe new life into the whole concept of decumulation planning. Put simply, retirement planning has just got sexier.
Imagine the flexibility of various tax wrappers coupled with a vast range of tax allowances, the ability to take different streams of proceeds and, in some instances, to be able to control the taxable date and options become almost endless. Visualise separate buckets of assets all with different tax rules applying, where there will also often be more than one tap to control the way money drips out. There is even a new tax break whereby up to £5,000 of savings income can be earned tax-free in certain circumstances.
Of course, it is going to require lateral thinking and a dynamic approach. Clients may need multiple tax wrappers with withdrawals to be taken from each in different ways at different times. This is not just about asset allocation – it is about out-and-out tax planning – and I have no doubt it will allow people to enjoy a more affluent retirement.
Some of our orthodox thinking will change. For example, it may now become wholly appropriate to raid an Isa box to fund a pension. What seems certain is more people will need to get used to “drawing down” capital in retirement and that is tricky as you do not know when you will die and how long it has to last.
Yes we must wait for the final rules to fully understand our new playing field and expect them to deal with out-and-out exploitation, which in truth serves no one. I would hate to see tax-free cash disappear for the majority because it was exploited by a minority.
The proposed changes should create a huge growth area for advisers. Indeed, a recent survey we conducted showed some encouraging statistics. Of those with retirement pots over £75,000, about one-and-a-half times as many people said they were now more likely than unlikely to take advice from a professional financial adviser.
Nearly all considered recognised industry standards to be helpful and many would welcome recommendation from family or friends on which adviser to use. Reasons for seeking advice included making sense of everything and accessing a wider product range but coming out on top was to give them peace of mind they were getting the best retirement option.
In the future, “retirement boxes” need never “all look just the same” and with proper advice and ongoing management they’ll be no “ticky-tacky” either.
Paul Kennedy is head of tax & trust planning at FundsNetwork