Is the price of pension freedom worth it?

Is the price of pension freedom worth it?

The move to what has been dubbed pension freedom was eagerly debated in the media, with positions being polarized between “about time” and “we’re all doomed”.

Those in favour of the changes pointed out that people were simply being entrusted with their own money.  Those against pointed out that people were given tax incentives to save into a pension on the grounds that it helped to relieve the burden on the taxpayer in their later years and that removing the need to buy an annuity could lead to people using their money irresponsibly and hence needing taxpayer-funded support.  Bringing these two positions into some kind of middle ground, changing expectations of retirement do require products which are suitable for changing needs and wants, but at the same time, some pensioners may benefit greatly from security and stability.  Because of this, each individual should look at the question of an annuity versus income drawdown to see what is right for them in their particular situation.

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

Annuities

Simplicity and convenience can carry a premium, but sometimes that premium can be worth the money.  Annuities were a frustration to some pensioners because they are, essentially, a very rigid approach to providing an income in retirement.  You choose the annuity you want, you pay the price and you live with your decision for the rest of your life.  While this means that annuities remain constant throughout changing circumstances, it has to be acknowledged that much the same could be said about employment income and that, in contrast to the job market, it’s impossible to be made redundant from an annuity.  Likewise, just like in the job market, some of the issues relating to annuities could be linked to the challenges of finding the right annuity for a particular situation, rather than annuities in and of themselves.  The price of annuities is that annuity providers are businesses and in order to stay in business they need to manage risk, which means that they tend to err on the side of caution when deciding what income they are prepared to offer in return for the individual’s pension fund.  The benefit of annuities is that once you have made your purchase, your annuities requires precisely nothing in the way of management and because your income is fixed, it’s easy for HMRC to calculate your tax liability so you’re much less likely to find yourself chased for tax you never knew you owed or trying to chase HMRC for a refund.

Income drawdown

This is the famous new pension freedom, about which so much was written.  Essentially it turns pensioners into retirees, with responsibility for investing their pension pot to maximize their returns.  The main disadvantage of this approach is, of course, that there is a big difference between potential investment returns and guaranteed income.  The more minor disadvantage is that the fact that retirees have the flexibility to vary their income makes it harder for HMRC to calculate their tax liability, which can lead to them making mistakes and therefore creating unwanted surprises.  Set against this, however, is the fact that retirees have much more freedom to manage their money as they see fit and can potentially generate far better returns for themselves than they would get from an annuity.

Uncrystallised Fund Pension Lump Sum (UFPLS)

UFPLSs are essentially a way of accessing pension pots which you have yet to crystallize by taking any benefits from them as either income or a lump sum.  They allow you to make withdrawals of which the first 25% is tax free and the rest taxable.  This is essentially a variation on income drawdown, albeit one with its own specific set of rules.

 

If you have any questions please contact your local Charles Derby Financial Adviser today on 0800 849 1279 or email This email address is being protected from spambots. You need JavaScript enabled to view it..