Resident IFA Blog

Is your Pension tax-free cash at risk?

Wed, 24th Feb 2010 - Author: Resident IFA

Apologies for my pre-occupation with Pensions in this Blog of late, although I have come across a couple of interesting scare-mongering (possibly) developments in the last week.

The first was in relation to Tax-free cash (Aka the ‘Pension Commencement Lump-Sum’). A colleague, and one of the higher-profile (a ‘Twitterer’) Independent Financial Advisers (IFA), were both contacted by Clients as a result of a Sunday newspaper article. These Clients were keen to release the tax-free cash from their Pensions...pronto!

The gist of the article in question was that the General Election, whether bringing about a change of Government or not, could adversely affect the tax-free cash (usually 25%) people can release from their Pensions. This scary story emanated from the writers belief that the incumbent political leaders would need to wrestle cash from somewhere as UK Plc is currently ‘hard up’...Public Sector net borrowing showing the first January deficit since records began in 1993...£4.3 Billion!

If you think that the (personal) Pensions-at-retirement market is currently worth around £15Bn per annum, likely to rise to £30Bn over the next few years, you can clearly see the benefits of cutting down the tax-free cash to, say, 20%. That is a lot of revenue back in the Government’s coffers.

The second worrying story was one that came from reading another finance website (an IFA favourite). The basis of how companies that provider retirement annuities (Aka your lifetime Pension income) might shortly have to change the way that they calculate the reserves they hold.

‘Solvency II’ is the EU legislation in question, due to take effect from 2012. This will change the basis on which annuity providers calculate the amount of reserves they need to hold against their annuity liabilities. Until now, the basis has been on Corporate Bonds (higher yielding), but the change will be to evaluating via Gilts (lower-yielding) – thus needing to hold larger capital reserves.

The result would likely be a 10%-30% drop in the annuity rates (income) offered to those using their Pension funds at retirement, especially hard on younger retirees where the provider potentially has a longer liability period.

Regardless of these (un)attractive potential developments in the Pensions market, the basics still remain:

- Shop around for the most attractive and suitable annuity rate via the Open Market Option (OMO), and

- Seek advice from an Independent Financial Adviser to help with this search and any associated issues i.e. the relevance of an ‘enhanced’ annuity, income guarantee periods, etc.

Until next time...

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Previous Comments

Added: 13 Mar '10
"Good evening, Mr or Mrs / Ms IFA, I would be interested to know how you work out the annuity rates and the likely compounded returns for the average person of pensionable age. I’ll declare my biased now, I think pensions and IFA’s are the biggest joke since the Pru and the like started door-to-door collections. I love the way pension companies state the obvious, “the younger you retire, the less return or the greater the amount you have to pay.” Unless you have an impaired life... “Invest for yourself and get a good return!” What's interesting is no IFA tells you this….A pension is about the worst way someone can invest in terms of retirement, with the company taking “% of profit and god knows what else!” I’ll discuss this… Here's a thought for people...invest in a pension, paying in year on year, to retire and be forced to invest in an annuity is bad. Save, invest in land, shares and other types of products and have full control of your monies (the pension companies only do the same). The difference is, if you invest in a pension you have a company / group of idiots dictating the value and amount (my view). Remember to have a wide spread of investments. Now, here's a fact for people that not one IFA tells you....I await the rhetorical and the evidence…Had ANYONE invested in a spread of financial instruments (minimum of 12 in the main FTSE 250) in any year since 1956, and held for the 30 year term you'd have returned more than if you had invested in a Pension Company, even allowing for tax and employer contributions; assuming you reinvested dividends. Yes folks a fact, but the big difference is the pension company wouldn’t keep the money when you die, or force you to buy an annuity at a certain age and you’d be free to do as you wish with your money! When you die your family would get it, NOT THE PENSION COMPANY. Don't let an IFA make you believe a pension is the best way forward. A pension company has one purpose, and that is return value to shareholders. A pension is the best way forward if you haven’t got a clue how to buy a share and wish to pay someone a minimum of 0.5% of your pot per annum to investment and dictate what they “call a profit!” That is why an IFA earns DOUBLE the average salary http://www.workhound.co.uk/salary/average-IFA-(Independent-Financial-Adviser)-salary.html , they take a cut of your pension and the pension company then takes a commission (management fee) plus the tax man in terms of return on investment. If you calculate the IFA’s fees, the Pension companies' management charges and the government cost on said pension company…you are actually on a losing streak. I reiterate that had you invested in ANY 12 (I mean any) companies in the FTSE 250 you would have performed better than any pension company. Remember that, stick to controlling your own money and ignore the advice of advisors that earn money from your “money;” this is what I call a conflict of interest. They aren’t a charity and earn a bucket load off your investments. To recap, never pay into a pension unless it’s final salary scheme. Invest for yourself and stick with basic rules…a nice balanced spread, in global companies and the like. Lets hear what an IFA has to say about return on investment, because the facts speak louder than anything they could present. I have written this assuming you know how to buy a share, before we get the excuse about complex investments and time/efficency costs. Take responsibility for yourself don't let other milk your profits."
- AClearView

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