My step-father retired back in January, and chose to hold off on taking his pension at the time because of the reforms that were due to take place.
This week saw the implementation of these new pension reforms for consumers in the UK, meaning my step-father can now get busy deciding what to do with his new found instant wealth.
I’ll be honest, part of me is worried about what decisions he might make. Of course, it’s none of my business what he does, after all it’s his money; but having worked in financial services for the last 20 years, I have enough of an understanding of what can happen to still be a little concerned.
I don’t think the impact these changes will have on the retirement sector can be overstated.
Just to clarify, the new rules allow retirees to access their entire pension pot and, essentially, do whatever they like with it. This is a huge shift from the old rules, which only offered the facility to purchase an annuity with the pension proceeds, which provided a regular income in retirement.
At first glance, the new rules appear fair to the customer, giving people like my step-father the freedom to spend, save or invest their pension pots in whatever way they wish. Recognising that retirees deserve this freedom is a welcome move from the government; however, a whole host of new risks are also being created. Here are just a few:
- Running out of cash – taking £3k a year from aged 65 will exhaust a £29k pot by age 75 (the average person has put aside around £30k for retirement). Life expectancy for this generation is 83 and 86 for men and women respectively.
- No annuity = no guaranteed income stream – dismissing the annuity option straight away could exacerbate the risk of running out of cash. It’s important not to rush into any decision regarding this until all options have been explored.
- Targeted by criminals – scam artists will be keen to take advantage of the instant wealth new retirees have found. Bogus phone calls and emails will already, I’m sure, be doing the rounds amongst people like my step-father. Criminals are extremely well skilled in exploiting the uncertainty that new retirees will have in understanding their options at this time.
- Understanding tax implications – some of the new changes allow pensioners to reduce the tax payable on pension wealth, especially where some of that wealth is intended to be passed onto loved ones. However, the possibility of incurring massive, unexpected tax bills also exists where income is taken without due consideration for what the tax implications could be.
It’s impossible to go through all the answers here, but there is certainly a lot of help and guidance available to those included in this first tranche of retirees, and this should be sought by all those affected. The free, impartial guidance made available by the government can be found here.
It’s an exciting time in pensions at the moment, and people like my step-father probably feel quite lucky to be retiring just when these new changes have been brought in. I’m not so sure I’d describe them as lucky. In reality they’re just the guinea pigs for my generation (in theory I’m only 10 years away from being able to access my own pension fund, although in reality it’ll be more like 20!), because by the time I retire, the risks, like the ones listed above, will either not exist or, at least, will be better controlled with more options available.
In the meantime, I’ll continue to worry about my step-father’s retirement and will try not to grimace at his frivolous spending. On the plus side, if he offers to take me out for a beer occasionally, who am I to say no…