Pension freedoms have changed retirement planning forever, unless of course the Government changes their mind, yet again. To be fair, the gene is out of the box and it would be difficult to see how we could see a return to how pensions worked and a return to the past.
So, what has changed?
1. Annuities are no longer the norm
That’s not to say that we should ignore annuities and we should certainly be exploring the potential benefits of an annuity at retirement. However, those with substantial pension funds can perhaps afford to bypass using an annuity as they may be more able to manage their pension fund in retirement. For many the traditional annuity that pays a guaranteed income for life are too expensive. The income generated is simply not high enough for the amount invested.
For many approaching retirement, being confronted with low annuity rates means that they need to consider using “pension freedoms” to deliver the long-term income they will need in retirement.
2. Your pension pot can now pass onto the next generation
In the past, if you and your wife/husband died having bought an annuity, your pension fund was lost and did not pass to the next generation. The new “pension freedom” rules have changed how pension fund money can pass on to the next generation, which is very attractive to many people.
Under the new rules, if a pension holder dies before reaching age 75, the proceeds of their pension pot can be passed tax free to their chosen beneficiaries (subject to the lifetime allowance), while benefits passed after age 75 are taxed at the beneficiaries’ marginal rate of income tax.
The rule change has given a new lease of life to pensions and many people are now considering the benefits of how to pass their unused pension fund onto the next generation. So much so, that in some cases it is advisable to spend the investments and savings, before spending pension fund money as the rules can be more favourable.
3. Managing Risk has become a bigger challenge
Traditionally, we take less and less risk as we get older, but the new “pension freedom” rules have made retirement planning more complex.
There are 3 risks that we will all have to take into account.
i) Longevity risk:This is the risk that we live too long and outlive our pension pot. Will we live too long is the question?
ii) Inflation risk:Inflation is the silent Inflation erodes the value of income, the purchasing power of your income over time. Will our pension fund be able to sustain increased levels of income as we get older?
iii) Sequence of investment returns:This is far less known and certainly less understood. Investments go up and does in value and the timing of the ups and downs can have a dramatic effect on whether your pension fund is sustainable throughout life or not. This is known as ‘pound cost ravaging’
4. Cash is no longer a safe home for your money
Cash has always played a role in retirement planning and always will. But it can no longer play the same role as it used to. The problem with a lot of cash is that it dramatically loses value over time and cannot help you maintain the value of your pension pot as you start to draw income. For example, if you take just 5% a year as income, your fund would be virtually depleted after 20 years as interest rates are now so low. The minimal interest rates return, will not cover the income withdrawal and are far less than the current inflation rate.
5. We now live in a constantly changing world
The old adage of “if you do what you’ve always done, you get what you’ve always got” has gone out of the window in recent years. What worked yesterday just won’t work today. Just look at interest rates for example. Who’s waiting for interest rates to go back up? Unfortunately, it is not going to happen any time soon, if at all.
Retirees now need to consider how best to manage their changing income needs in retirement in the next few years and how they manage risk will be critical if they are to get the income they need in retirement. Fewer and fewer people will benefit from the generous benefits of ‘final salary’ pension schemes and will all need to make bigger decisions that may affect us for the rest of our lives.
Are you concerned about how to best manage your pension and investments in retirement? Worried that you may run out of money?
Contact us to today. We can review your current situation and let you know what options are available to you.
If you would like to talk to about financial planning, please get in touch for a no-obligation meeting. Go to our website www.miadvice.co.uk and contact us via our “Get in touch” form on our home page or Contact Martin Dodd on 01902 742221.
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It is advisable to take advice from a professional financial adviser when making major financial planning decisions.
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This article has been prepared in good faith and based on Midlands Investment Agency’s understanding of the law and interpretation thereof at the time of creation. The contents should not be regarded as specific advice and we always recommend that specific advice is sort from a qualified professional. No responsibility can be accepted by Martin Dodd or Midlands Investment Agency Ltd., for any loss that may occur by a person acting or refraining from acting on the basis of this article.