During my 20 years as a financial journalist, Budget days sometimes turned out to be a bit of a damp squib. It was a case of scouring the small print in the hope of finding something interesting and different to write about.
Not so in the case of Osborne’s Budget 2014. In a delicious irony, my first Budget as a fully-fledged IFA turned out to be an absolute crackerjack. Simplified Isas, a pension revolution, voluntary top-ups to the State Pension – there is a lot to get your head around. At David Williams IFA we are already looking forward to exploring some of the new freedoms with clients.
Some fear that an end to GAD limits or the straight-jacket of an annuity will see savers draining their pension quicker than a Lamborghini blasting off the lights.
But, we expect that the freedom to draw whatever you want, whenever you want from your pension will have the opposite effect for many of our clients. It takes away any pressure to keep drawing income just to get money out of a restricted pension environment. In future it will make more sense to leave funds within the tax-favoured pension wrapper until you actually have an immediate need for it.
However, one section of the “Freedom and choice in pensions” consultation paper has got alarm bells ringing. Blocking transfers from defined benefit to defined contribution schemes could seriously disadvantage a minority of scheme members.
These are those individuals who, for a variety of reasons, do not want or need the “one-size-fits-all” approach of a regular DB scheme pension. They might be single, so have no need for spouse’s benefits, or have a health condition that makes an enhanced annuity a more attractive option. They may want the flexibility to vary their income, perhaps boosting it for a few years until other pensions start or their State Pension is paid before then scaling back income to preserve some inheritable value.
For most people, most of the time, staying with a secure defined benefit pension is still likely to be the best outcome. That is why the Financial Conduct Authority rightly says the starting point for any advice should be that a transfer is not suitable. It is up to the adviser to demonstrate that, for a particular client at a particular time, there is a genuine reason why they need a tailored pension through DC rather than a one-size fits all through DB.
The Government has concerns about the economic effects of a mass outflow from DB, especially from unfunded public sector schemes. I understand these fears. But there is a definite case for greater flexibility than the current proposals suggest.
A beefed-up advice process might well be at the heart of a solution that balances the interests of both pension funds and their members. There are already stringent criteria for advising on DB transfers – for those clients who actually take advice.
Making regulated advice compulsory, with perhaps some revised criteria on what makes an appropriate transfer, could stem the outflows and guard against the horrors of a frenzy of pension liberation without completely closing the door to those with a real need for something other than the one-size-fits-all defined benefit pension.
Stephen Womack is an adviser with David Williams IFA Chartered Financial Planners