Despite the best endeavours of governments of different hues and campaigning from the pensions industry, it appears that we will never achieve pension simplification.
Pension planning is more complex than ever and it is essential to obtain quality independent advice, particularly where Pension Drawdown is concerned.
From April 2011, you now have the choice of Capped Drawdown or Flexible Drawdown. The new Capped Drawdown rules will inevitably limit the levels of income to many planholders when future plan reviews are held, and forward planning is required to avoid possible financial hardship.
The Flexible Drawdown concept is so new that only a limited number of providers have made it available, and the Coalition Government are still very much making things up as they go along. Most issues concern the Minimum Income Requirement and what does and does not constitute secure ‘income’. This week we received confirmation that index linked annuities are not income and, for that matter, neither are pensions paid from some occupational pension schemes.
The most recent rule changes have also introduced a significant increase in the potential tax charges that may apply to death benefits paid from a Drawdown arrangement. The potential tax charge is now set at 55%.
We have also noted market commentary on the impact of mortality cross subsidy. The principle of mortality cross subsidy is that those who die prematurely, and before their normal life expectancy, will subsidise those who live longer than expected. It is a myth that the value of these annuities is used to swell the coffers of the annuity providers. In fact, it is the surviving annuitants that benefit because the calculation of annuity rates includes an element of subsidy for all annuitants.
Investors who remain in drawdown do not get this benefit. This represents an additional risk as there comes a time when drawdown plans must deliver an extra investment return that compensates for the absence of mortality subsidy. Research indicates that the impact of the loss of this subsidy increases with age and it is therefore important to re-consider annuity purchase on a regular basis.
We have also noticed an increase in the number of our clients who qualify for an enhanced annuity due to factors such as postcode and certain medical conditions. This can result in a significant increase in retirement income when compared with standard annuities or pension drawdown.
In light of all of the above changes, pensioners receiving retirement via Drawdown should review their options and consider whether a change in strategy is needed. The range of pension options available mean that it is rarely an ‘either or’ choice and a number of strategies can be adopted simultaneously by taking a phased approach.
At Innes Reid we possess the skills and resources to assist all clients in respect of their retirement income planning whilst also providing truly independent advice.
You are welcome to contact James Keane for any further advice firstname.lastname@example.org
Member since: 10th July 2012
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