13th November 2014 by The Harried House Hunter
Politicians, pension firms, financial watchdogs and consumer groups are in the middle of a huge debate about what you are going to do with your pension.
Maybe they should ask you.
With the freedoms announced in the Budget, everyone is wondering whether you will do the right thing or at least mostly right thing with your retirement money.
Such discussions are usually the preserve of experts, policy wonks and politicos and their impact is often felt years in the future. But this time, it could have a very big impact on what you can do with your money and how you manage it, in just a few months’ time.
From April, if you are over 55, you will have the ability to do what you want with your pension money. You can take it all if you are prepared to pay whatever the marginal rate of tax is for that year. You can buy an annuity. You can leave it invested. The last strategy, known as income drawdown, has been subject to all sorts of rules up till now. These plans were usually restricted to those with substantial investments.
But what if you have what might be described as a mid-sized pension pot – let’s says short of but not far off £50,000 – and want to leave it invested in the stock market?
Up till now, the received pension industry wisdom was that to be in income drawdown you really needed about £100,000. Many independent financial advisers would say you needed substantially more.
Now the watchdog, the Financial Conduct Authority has told the committee of MPs working on the new pension legislation that drawdown would appear to be unsuitable for pots of under £50,000, mainly because a combination of investment risk and charges eat away at the money. The implication is that you could run out long before you die, though the regulator also suggested new, cheaper products might emerge. The regulator’s view is reported here on trade website Money Marketing.
This suggests that it could be very difficult for your financial adviser to recommend drawdown if your pot is smaller than this or they might get into trouble with the regulator.
It will differ case by case. You might have a separate defined benefit pension or ISA savings which change that calculation.
Nevertheless, in many cases, advisers will be pointing you in the direction of an annuity provider. So if you have a mid-sized pot, it might suggest that you can’t use drawdown with an IFA’s help.
Hmm. So can you do it yourself or in industry parlance use an execution-only service? Well, it looks like it. Many providers have already dramatically reduced the amount you need to stay in drawdown. Standard Life and Aviva’s minimum is now £30,000, so the answer to that sounds like a yes.
But given that people can take all their money and invest it in anything from a Lamborghini to a nice little investment property in a war zone, it is surely fair to ask whether the rules shouldn’t be adjusted.
This certainly isn’t the financial watchdog’s fault. It is quite likely that the pension reforms caught them on the hop. The suitability rules which advisers must apply make a huge amount of sense. They have protected many investors and seen others receive compensation for poor advice. One could understand why the FCA may well believe that it tinkers with them at its peril.
But what if you have a mid-sized pot and you don’t want to access most of the money. What if you don’t want an annuity, want to stay invested but don’t want to design your own strategy? Surely financial advisers should be allowed to help.