(Securing a reliable retirement).
With sweeping pension and retirement reforms underway now in the UK, there is new freedom and flexibility on how people save for retirement and take an income when they stop work. These changes are due to take effect from April next year.
It is a total overhaul for retirement planning which means that everyone aged over 55 with a defined contribution pension fund will be free to take their money whenever and wherever they like subject only to tax rules. The first 25% of a pension fund can be taken tax free but the rest is subject to income tax. The 55% death tax on money left in a pension fund is being scrapped for drawdown customers.
Millions of people will be able to benefit from new rules guaranteeing free and impartial advice delivered by independent groups such as the Money Advice Service and The Pensions Advisory Service and pension companies are working hard to create new retirement income solutions.
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It is clear that a lot is going to change but key things stay the same – good financial advice is now even more important than ever because savers need to fully understand all their possible options in retirement. Face to face advice with a professional still ensures a safe environment where any questions or concerns can be fully answered before any retirement plan is set in place.
The need for security in retirement and certainty in retirement saving will remain the same and savers will still value the need for protection of their pension funds in the run-up to retirement and the prospect of growth. And there will still be a need for certainty over income in retirement.
The aim of the recent UK pension overhaul is to deliver more comfortable retirements for savers by enabling them to use their funds as they see fit. However it has created some uncertainty – research* among specialist financial advisers shows nearly two-thirds (63%) have recommended delaying retirement planning decisions until after April 2015.
Currently just 8% would recommend annuities to clients with £50,000 in pension savings and 38% have recommended drawdown to some clients where previously they would have recommended annuities.
The need for certainty over retirement income turns the spotlight on retirement plans such as those offering unit-linked guarantees which have seen strong growth in the UK because they help promote stability and certainty for retirees.
Essentially, unit-linked guarantees ensure investors are guaranteed a capital amount or an income for life, while having the potential to earn a return on their investment. They can be used with investments such as bonds, or to save for retirement, and also once clients have retired and want an income from their money.
When can unit-linked guarantees be a good idea?
- If you have money in bank or building society deposit accounts earning low rates of interest, a unit-linked guarantee can protect your investment and offer the potential for better returns.
- If you want to make sure you don’t miss out on stock market growth, unit-linked guarantees offer the potential to lock-in gains when the stock market rises and protect them when the market falls.
- If you are saving for retirement and want certainty of income, unit-linked guarantees offer deferred income guarantees which mean you can plan ahead and know how much income you will have when you do stop work.
- A guaranteed death benefit provides peace of mind and certainty for beneficiaries.
- If you have pension money in a number of funds you can consolidate all your pension pots into one place and guarantee the amount before retiring.
When should you avoid unit-linked guarantees?
- If you are retiring and want the maximum income possible for life immediately from your pension fund, a conventional annuity or enhanced annuity for people with medical conditions or lifestyles affecting life expectancy can be a better bet.
- If you are happy to take a higher risk then a spread of investment funds will probably be a better bet for fulfilling investment goals.
- If you can afford to risk losing your money.
Unit-linked guarantee pension plans offer a range of solutions which can be used in the run-up to retirement and in retirement.
Income guarantees – you can receive a guaranteed income for life based on your age when you start taking the income. Income can increase depending on investment performance. Unlimited gains can be locked in annually.
Deferred income guarantees – you can lock-in your investments now with the guarantee that income will increase for each full year you defer taking an income. Once you take the income you can lock-in unlimited gains annually.
Capital guarantees – you can guarantee the value of your investment for a term between eight and 20 years. If the market rises you can lock-in unlimited gains annually.
Guaranteed death benefits – you can ensure you leave something to dependants as all unit-linked guarantee products include a guaranteed payout to beneficiaries.
How much do they cost?
Charges depend on what type of guarantee is chosen and how the money is invested. Capital guarantee costs start from 0.35% a year and income guarantees cost between 0.95% and 1.2%.
As ever if you have further questions please do give me a call.