Will the pension floodgates open?

Very shortly, members of private pensions will be able to enter flexible drawdown. Much speculation in the press has surrounded the possibility that people will encash their pensions and spend all their savings leaving them reliant on the state to fund their future, 

but in reality, will this really happen?

In my opinion; probably not. Most UK pension plans will not be able to facilitate flexible drawdown yet in any case; providers have already been weighed down with the cost of changing systems since RDR, and are now expected to facilitate this new legislation too. We will however hopefully see a new wave of individuals seeking advice, both in the UK and abroad as people seek ways to best take advantage of these rules. Initially there may be an influx of people believing that they can liberate their pensions alone, however once they make that call to their pension provider and are faced with hundreds of questions, numerous options and tricky declarations to complete in order achieve what they want themselves, they may well change their mind. Of course, those in DB schemes must seek advice in order to transfer out.

I believe that we will see an increased interest in pensions from our clients, existing and new. This is great for our industry and business and I also believe it is a good move for the wave of people receiving the pension freedoms available from April. Most likely, those over 55 years will want to withdraw a little more than usual, perhaps access a lump sum in order to purchase a car or finish the extension, but the amount of people wanting to withdraw their entire pensions either all at once or across a couple of tax years may not be as large as was first feared.

It remains to be seen how encashing annuities will work, we already know this encashment will be fully taxable, but what sort of rates will the insurers offer, or will it work more as a secondary market as we’re now lead to believe? Will those purchasing annuity plans underwrite members again, so as to try to avoid those in poor health and not offer as much in exchange? Or will further legislation ensure that everyone gets a fair deal, making insurers use a set calculation or rate based only upon age?

We will most likely see people opt to switch their annuity into income drawdown in order to properly plan for income tax, but smaller pots will likely be liberated all at once. The election is on the horizon and as ever for this time of year our profession is left to wait with some uncertainty to hear how our industry is likely to be affected. The governments favourite toy; the pension has been played with more than ever, and hopefully the changes won’t be detrimental to the people however will emphasise the importance of having and giving good financial advice.