How pension reform gives clients more options

Retirement Planner speaks to Andrew Tully about how recent reform is changing how people view their pensions.

Reform of retirement income rules has brought flexibility to many peoples' financial plans. However, what issues do people need to bear in mind when opting to use flexible drawdown?
Firstly, I don't think that many people will be using flexible drawdown due to the high £20,000 per year that the client needs to have to meet the minimum income requirement.
The Pensions Policy Institute recently did some research that confirmed that this is the case. Even if you can take advantage of flexible drawdown, there are still big issues that need to be considered - most notably the income tax charges the client can face.
If a client wanted to cash in their entire pension fund at once, then the chances are they would be hit with a 50% income tax charge. As a result, it is far more tax efficient for the client to take out this money in chunks - almost like an accelerated drawdown.
Of course, once the money has been taken from the fund, then there is also the dilemma as to what the client should do with it as they will need to take steps to shelter it from a possible inheritance tax charge.
The client can spend it, give it away to family or else put it under trust, which enables the client to retain some degree of control over the money.
I believe that this is an area where the adviser can really add value by sheltering the client's fund from IHT while also minimising income tax.

What do you think are the big opportunities arising from these changes?
I think we will see more people look to move more into the middle space between annuities and income drawdown - I think there are real opportunities here.
A lot of people need to have some kind of guarantee in place, but would find the ability to remain invested in the markets attractive.
I think being able to package this into one solution will be a challenge that the industry wants to get to grips with and I think there is plenty of room for innovation.

What do you think are the major lessons that advisers are learning from this process?
For advisers, I feel their main challenge is getting to grips with the increased range of options available to them.
Rather than looking at one product as a solution, we will see advisers look to deploy a range of options to help their clients get the most from their retirement income.
As a result, we won't see clients looking to put 100% of their money into annuities or drawdown - they will shift between the two in phases over a period of years. Another issue is that conventional annuity providers are now giving better rates for smaller pots than they have in the past, so it could make sense to purchase annuities in slices rather than all at once.

As people have more flexibility in how they take their retirement income, will we also see a change in how people view their pensions? For instance, could the ability to strip more income mean that people would start to look more at the tax incentives of this process?
In the past, the 82% tax charge connected to ASP effectively stopped people from leaving their pension fund to their family.
Now, being able to pass a pension on to family will become a key estate planning issue, though the 55% tax charge associated with that could still prove to be a major barrier.
Advisers and their clients are very much looking to see if there is a better way of doing things such as stripping money out via drawdown or asset backed annuities and giving surplus income away. The client can move the money out of their estate by putting it into say offshore bonds written under a suitable trust or into a pension for their children.
There are a mix of options open to them and this method has the added benefit of allowing the client to see the benefit of their gifts while they are still alive.

Andrew Tully is pensions technical manager at MGM Advantage