‘Any colour you want, as long as its black’ said Henry Ford as he introduced the world to his Model T Ford car.
We could have said the same of retirement income choices up until a few years ago. ‘Yes, Mr and Mrs Client, you can have your pension income in any form you like as long as it’s an annuity’. There was some choice. You could make decisions based on current health, marital status and payment frequency, but at the end of the day, the choice was still an annuity with a few little extras – and two major flaws: the choices were irreversible and the income ceased on death or the death of the surviving spouse if you opted to include a widow’s pension – and who really has any choice on that one?
Incredibly, it has only been a year since pension Freedom was introduced but it feels like a lot longer, so we thought we would take a look at the main changes compared to the dark days of annuities.
Policy holders are now in charge of their own income in retirement. But with freedom comes responsibility and we’ve heard of stories of people ‘doing their own thing’ and generating huge and unnecessary tax bills in their rush to get their hands on all their money – just so that it can be placed in a bank account earning 1% interest !
Clients can match their income to their needs. Early retirement can be a great time for travelling, taking up new hobbies etc before settling down in to a possibly less expensive middle retirement. The problem with annuities is that they assume your expenditure will be more or less constant throughout your retirement, but this is rarely the case. There are broadly speaking three stages in retirement: an early stage with travel and new hobbies, a settling down to a less expensive retirement stage and a final stage where health issues might impact on quality of life or life expectancy.
The most striking difference between the old annuities and the new freedoms is that with an annuity, you literally purchased an income with your pension fund and lived with the consequences of those decisions you took in choosing your annuity. In recent years we have seen the introduction of fixed term and investment linked annuities – but they are more or less variations on a theme. With the new pension freedom rules, you continue to benefit from keeping your pension fund invested whilst having access to money in a way that can be managed to suit your changing circumstances. There are no irreversible decisions to be made but you are taking on investment risk which is why qualified advice is so important.
In the event of death, the new rules allow you to pass on the remaining fund to your spouse or children – or even to any other person or organisation. Annuities, to put it bluntly, stop when you do. Admittedly, like the Duracell Bunny, they will keep going as long as you do, but for most of us, life ends too soon and current annuity rates require around 25 – 30 years of long and happy retirement to reach a break even point.
So back to the Model T Ford. You can have one car as long as its black – to meet your requirements for the rest of your life, whatever they may be, or you can choose a car that can adapt to your changing circumstances. You can change the colour, style, or size. You can move from manual to automatic or vice versa. You can choose a car that will adapt to your ever changing lifestyle in retirement.
For practical advice on managing your pension income in retirement, please contact us >>