15th April 2014
The prediction of the death of annuities are premature says Andy James, head of retirement planning at financial planning firm Towry.
James says that for those who either do not have the tolerance for risk to maintain investments into later life and prefer a greater level of certainty, or who simply do not have sufficient funds invested to make drawing income directly out of their pension cost effective, an annuity will likely still be the best option.
He adds: “There is no doubt that with the increase in smaller pension pots and the rise in triviality limits – taking a pension as a cash lump sum – the lower end of the market may disappear.
“The middle market will still be a source for some pension funds unless all those with these relatively small amounts of pension simply decide to blow the lot on a couple of nice holidays, or that car they have always had their eye on.”
James is hopeful that the Government’s stated intention of ensuring that everyone gets financial guidance prior to making a retirement decision will mean that those with pension funds burning holes in their pockets are persuaded to look a bit further into the future than a round the world trip.
“Certainly, for those with larger pension pots the added flexibility when making their retirement decisions will be welcome. However, with that added flexibility must come added responsibility. Just because you could take all your money out of your pension doesn’t mean that you should. Not leaving sufficient money for older age or conversely not daring to spend funds when they are actually available and therefore having an unnecessarily poor retirement are both outcomes to be avoided.
“Cashflow forecasting, which takes someone through their whole life expectancy, should be a must when reviewing any plans. From this it will be possible to ascertain, with reasonable confidence, a suitable level of withdrawal and thus ensure that hard earned savings outlive their owner – but not by too much”, he adds.
He says that with cashflow planning it will be important to consider when best to be withdrawing funds so as to gain the best tax advantages.
“It should certainly be possible to obtain substantial annual sums in your pocket without any nasty tax consequences by juggling withdrawals from different investment types, and of course by reducing the tax you pay the longer your money will last!”