Making the most of your pension

In May, Retirement Planner held a breakfast briefing on retirement income. Ray Chinn, head of pensions at LV=, gave his view on the future of retirement income

We have some changes in the income drawdown market recently, but for most people the annuity is likely to be the most suitable option.

Obviously, you need to look at individual circumstances. Flexible drawdown was a bit of surprise for many of us in this industry.

We didn’t expect [the] government to come up with a whole new product concept.

The Pensions Policy Institute (PPI) has done some research about the number of people who might use it and they said ­something like 2% of today’s 55-75-year-olds could use it.

This is not a huge number of people, but as people build up more funds then flexible drawdown might become ­interesting.

Probably the most interesting thing in the PPI report was their long list of risks. Many advisers will be familiar with talking to clients about risks for instance, ­investment risk.

We also talk about mortality risk, longevity risk and ­inflation risk. There are others on the list: the risk for growing consumption.

This is where the client decides not to spend money because they are scared of running out. Another risk is the risk of changing circumstances.

I think that is the one we could struggle with because nobody knows what things are going to be like in five years’ time.

If you have time, do look at the PPI report as there is some interesting stuff in there  have a think about your ­clients and how you can work out those risks with them.

Another interesting thing that has happened is we are back to three-yearly reviews. Whatever goes around comes around, so we did have three-yearly reviews, then we went five-yearly now we are back at three-yearly.

In our conversations with HMRC and the some of the consultations we got involved in, we discussed the risk of people exhausting their funds when they are taking GAD max.

The three-yearly reviews are really about making sure that we are checking in on the amount of income that’s being taken out on a regular basis. 

We’ve also reduced the maximum GAD rate from 120% to 100% and we’ve got some new GAD tables coming out.

These will push the level of income that ­somebody can take down a bit. This reduces concerns the ­government have about people falling back on the state.

Lump-sum death benefits

I wanted to mention the issue of lump-sum death benefits. I am not sure if it’s coming under the radar, but it’s certainly something that’s coming up in my conversations. It’s quite good for the over-75s in drawdown because they won’t have to pay 82% tax as we all did in ASP.

Interestingly, once you are past 75, you get taxed on the uncrystallised funds as well as crystallised funds, so there’s a change there.

The big one for me is that if you look at lump-sum death benefits in drawdown, they would have paid 35% tax and they are now ­going to pay 55% tax on that.

It is a bit of hike in terms of tax on death and I think it does deserve a bit of ­attention in terms of looking at your clients’ income needs. 

Let’s go back to flexible ­drawdown. What would the impact of flexible drawdown be on the annuity market in particular?

Let’s have a quick look at what flexible drawdown is and how it might be used. The Minimum Income ­Requirement (MIR) is the first thing to deal with. What is it, how does it work?

Effectively, the retiree needs to have an income of at least £20,000 pounds a year. The £20,000 must be received in the tax year you enter flexible drawdown.

So you don’t have to have that £20,000 paid today, but you must be able to evidence you’ll get £20,000 during the year.

The debate over the past few weeks has been about RPI linked annuities – did they count?

When the proposal was first published, the only type of continuity that would count for the MIR was an RPI linked annuity.

Now it’s about the only type of annuity that won’t count.The reason is because RPI-linked annuities can go down as well as up.

A lifetime annuity is fine and ­investment linked annuity is fine – as long as you use the base amount rather than some growth.