The perils of pension withdrawal

I was reading an article recently which indicated that one in ten (10%) of those planning to retire this year expect to withdraw their entire pension savings as one lump sum, according to research by Prudential.

The research also suggested a fifth (20%) of people retiring this year would risk avoidable tax bills by taking out more than the tax-free 25% limit on withdrawals.

The study found such people were not necessarily spending all the cash – the main reason given by those taking all their funds in one go was to invest in other areas such as property, a savings account or an investment fund, with almost three-quarters (71%) choosing those options.

Of those planning to spend the cash, the most popular use was for holidays, with a third (34%) planning to spend the money on trips. A quarter (25%) planned to spend their money on home improvements while a fifth (20%) planned to give money to children or grandchildren.

Since the launch of pension freedom in April 2015, more than 1.1 million people aged 55 and over have withdrawn some £15.74bn in flexible payments.

Government estimates have indicated around £2.6bn was paid in tax by people taking advantage of pension freedoms in the 2015/16 and 2016/17 tax years, with another £1.1bn raised in 2017/18.

Prudential retirement income expert Stan Russell said it was worrying so many people planned to withdraw more than the tax-free lump sum limit.

“The risk is even greater for those who are taking all their pension fund in cash,” he added. “They not only face paying more in tax than they have to but also put their long-term retirement income security at risk.”

My question is, did they take advice beforehand?  Dis they consult an Adviser to talk through the ramifications of their actions beforehand.  Based on the reasons given, makes me doubt that.

For example. Why would you take the money out of a pension to invest it – it already is invested and in a tax efficient wrapper!

Of course, everybody is different with different objectives.  But at least discuss these with your Adviser so that you have all the facts to hand before making a decision.

If you don’t already have an Adviser, give us a call.  An informal chat with us might save you a lot on money.

 

Impact of divorce on financial assets

I was reading an article recently which said that while divorce and relationship splits are a tricky subject to broach – certainly from a financial viewpoint – there is still a worrying lack of protection afforded to those in that position.

In the article it stated that research by Kleinwort Hambros found that a quarter (27%) of British adults in a relationship don’t have any financial protection to cover themselves in the event of a relationship breakdown – a further 37% said they were whether they had mitigated any financial risk.

However those of an older age are more likely to have some protection in place.

Paul Kearney, head of private banking for Kleinwort Hambros, said recently that relationship splits are very “isolating” and “life-changing”. But, from a financial perspective, if managed properly can help people regain control in their life.

“One of the most important issues to consider is the financial settlement, which involves navigating a complex set of decisions that will have serious implications for the future,” said Kearney. It’s essential to seek support from a team of professional advisers who can help make informed choices.”

For adults looking to protect their household and personal finances, the most common way this is done is through marriage law (35%), with an informal verbal agreement with their partner (13%) the second-most common.

While marriage and civil partnerships offer the most financial protection in terms of the redistribution of assets and income post-divorce/dissolution, pre-nuptial agreement are becoming more common, according to Alex Davies, partner and head of family for lawyers Cripps. “This does require honest and frank conversations, but many people find that a positive experience,” he said.

“For those not wishing to formalise their relationship in those ways, cohabitation agreements are extremely effective in setting out the financial rights and responsibilities of each partner whilst living together and what they can each expect if they separate,” Davies added.

Hopefully, it will not happen to you, but if it does a conversation with your Financial Adviser might not go amiss either.

 

Tax Diversification also?

The respected Tax Adviser Danby Bloch has recently stated that diversification is not just an important strategy for investment – it also makes sense when it comes to tax planning.

And with the current low level of new business flowing into life assurance bonds, maybe this a way of mitigating Inheritance Tax which has been forgotten about.  Only about 3 per cent of assets on adviser platforms is held in the form of UK or offshore bonds, according to recent Platforum research.

Unsurprisingly, the main focus of inheritance tax planning is on pensions and business property relief (BPR) investment. And there are good reasons for their popularity, seeing as they provide the irresistible and currently politically-fashionable attraction of both having your cake and eating it.

You can hold on to the asset in your estate and access it for spending if the need arises but it is free of IHT at the same time.

There is, of course, a requisite two-year wait for a BPR investment to qualify for IHT freedom, although that does not normally present a serious problem for most clients.

What could be better than that?  Not much.

Even if the original investor takes a relatively short-term view, their beneficiaries may well be able to weather investment storms and sail through to better times and returns.

Pensions are currently IHT-free on death, although the age at death means there is something of a tax lottery. Still, the underlying investments should be more mainstream and less volatile, especially with a foundation of fixed interest.

What is not to like, however, is that neither of these tax privileges are guaranteed to survive a Labour government or even the current chancellor, who has set the Office of Tax Simplification to review IHT.  The OTS has asked interested parties for their views on a whole range of issues, including BPR, pensions and life assurance.

Bloch is of the view that the current structure of BPR is very generous by international standards. And while there are some solid reasons it might possibly survive in its current form, things can change quickly.

Family businesses are arguably the backbone of UK enterprise, so encouraging them to take an intergenerational long-term view makes a lot of sense for the government. But some would argue these reliefs can also stultify enterprise and reinforce social immobility and privilege. The tax breaks have survived several decades of different governments but they might not continue to be so generous in the future.

The Art of Managing Income in Retirement

Managing income in retirement has become a conundrum for our times, with advisers, clients and the pension industry all offering different ideas on the best way to solve the same problem.

It isn’t unreasonable for retirees to want the best of all worlds; flexibility, access and control over their retirement savings along with the reassurance that their money will last for as long as they do. But, what is the best way to deliver a consistent and robust outcome for every client in retirement?

Research has found that 53% of advisers said they adopted a centralised retirement proposition (CRP). However, when asked about when clients move into the decumulation phase and require income, overall 57% of advisers still used the same investment strategies, for both accumulation and decumulation.

However, the ongoing challenge that is facing advisers of clients who are moving from accumulation to decumulation in retirement, is one of finding a way to use products and investments to mitigate income volatility rather than a complete focus on capital volatility.

What is also clear is that decumulation in retirement brings with it a different set of challenges compared to the accumulation stage and maintaining the same investment strategy for both invites potential difficulties for both adviser and client.

Every client has different needs and objectives and we at ABFM have adopted, in most cases, a robust advice process specific to decumulation which allows for an investment strategy that can adapt to the post retirement rigors of pound cost ravaging and sustainability of income for life. A de-risked decumulation strategy also widens the focus for what lies ahead for retired later life, the vulnerability challenges, and changes to risk perception and capacity for loss.

Even those clients whom we have advised to follow a more traditional path, agree that a de-risked decumulation strategy will ultimately be necessary for them to follow.

We, as advisers, believe that we are at the centre of this revolution in retirement thinking because for most people, retirement will be a huge and important part of their lives, and as such needs the focus, consistency and surety that a decumulation proposition can offer.