Member Article

Ferrari or Ford?

A question that I am frequently asked by clients is whether they have, or will have, enough money saved to retire comfortably and fulfil their lifelong ambitions. Given the promise of increased pension flexibility at the point of retirement, announced in the Spring Budget, it is a question that clients will go on asking but maybe with a bit more interest now that you can potentially get your hands on a lot more, a lot faster.

The new flexibility announced by the Chancellor was welcome. He opened up the prospect for people with defined contribution pensions to choose alternatives to a lifetime annuity when they retire. Flexible drawdown will now be available to those meeting a minimum income requirement figure of £12,000 (until April 2015) – down from £20,000. Whilst up to 150% of the Government Actuary’s Department benchmark annuity rate may be taken from other drawdown pensions.

From April 2015, there won’t even be a need to secure £12,000 of guaranteed income; the flexible drawdown rules will be available to everyone raising comments from some sceptics that retirees will be out buying Lamborghinis with their pension funds rather than taking a sensible income. To be quite frank, with the average pension pot of retirees in the UK being £30,000 it is more likely that the car of choice would be a Ford Focus, not a £345,000 used Lamborghini!

Fortunately, the Chancellor recognised that the increased freedom to choose what to do with your pension pot brings a greater need for advice at retirement. Fine, but it is equally important to look at the likely adequacy of that pot, which ideally means taking advice periodically during your working life to ensure your various pension plans will deliver what you expect. Whether your aim is to be able to pay the bills or buy that supercar is up to you!

Many people who now near State Pension Age have built extra pension through graduated contributions, the State Earnings-Related Pension Scheme (SERPS) and State Second Pension (S2P), which will for them be unaffected by the new flat rate State Pension (about £146 per week in 2014 terms) that starts in April 2016. After that, extra pensions will be phased out, but with some protection promised for earlier contributions.

The reining-in of State Pension benefits was prompted partly by rising life expectancy. So, women just over 60 are already chasing a moving target as the female State Pension Age heads for 65. When they have caught up with the men, both will advance hand-in-hand towards a pension age of 66 or 67. More people may opt to work beyond 65, as recent legislation entitles them to do, if only to cover the gap years.

While the State Pension looks like a devaluing benefit, more has been done to encourage us to make additional pension arrangements. In 2012, auto-enrolment was introduced to get virtually every employee into a workplace scheme. Smaller companies have yet to join in, but they will over the next three years.

The Chancellor’s recent measures added further emphasis to the importance of pension planning. So, whatever your situation, your own plans could benefit from a talk with your adviser. If time allows, you can make extra provision in advance. If time is short, there are ways to utilise other assets to help featherbed your main retirement nest egg.

In other words, adopt a broad-minded approach to your retirement finances. Consider a portfolio of income streams – from tax-sheltered ISA income to part-time earnings – as reliance on a single source is becoming outdated.

This was posted in Bdaily's Members' News section by Adam Deacon .