9th April 2015
It has been an extraordinary first few days of the new pension freedoms writes Tom McPhail, head of pensions research, Hargreaves Lansdown…
Investors have shown a keen interest for the new freedoms, with a fourfold increase in calls to the dedicated Retirement Helpline and a 70% increase in pension calls overall.
A critical challenge for investors is to determine how they should allocate their pension fund capital. Most retirees should secure a base level of income which will meet essential spending. This could be from a combination of state pension, company pensions and annuity. The challenge for them is how much capital to allocate to an annuity and how to manage their drawdown fund.
How much guaranteed income to buy? The self-service retirement planner solution
Notwithstanding investors’ evident enthusiasm for the new pension freedoms, many of them will still want and need to buy some guaranteed income. Past research has shown that around 75% regard a guaranteed income as quite important or very important and around 50% intend to buy an annuity with at least part of their pension pot)
The government’s Pension Wise service provides valuable guidance but it will not help investors to actually set up their retirement income. This retirement planning tool helps to fill the vacuum in between free guidance and a full advisory service.
We have seen some slightly unexpected activity; for example existing drawdown investors choosing to cut their income withdrawals now, in order to be able to take larger lump sums later. We’ve also seen a surge in death benefit nomination instructions as investors adjust to the more generous tax treatment on funds after death. It will be some weeks or months before clear patterns of investor behaviour really settle in
From the calls received by Hargeaves Lansdown this week – these are the top five questions being asked by investors:
1. ‘How do I convert (my existing capped drawdown) to new flexible drawdown’; additionally ‘what does it cost’, ‘does it happen automatically’
2. ‘If I withdrew all of my pension, what would I get after tax’? There are two issues here: taxation generally, and initial deduction of tax on emergency rate. When you take account of HMRC’s widely reported trouble with their phone-lines, this is likely to cause massive uproar when people start receiving a fraction of what they thought they were getting
3. ‘When will new drawdown be available?’; it seems at lot of investors are finding that their current pension provider is not ready for the new freedoms
4. ‘How can I take money out of my pension’
5. ‘How do I set up death benefit arrangements for my wife/children?’