Stan Russell, Senior Business Development Manager, considers what to do during the holding period between now and next April
Which camp are you in? And, more to the point, which camp are your clients in? I am firmly in the Revolution camp as the dust settles on theChancellor’s 2014 Budget Statement. Although nothing is yet cast in stone, cross party support for the bulk of the proposed changes announced on the 19th March 2014 suggests we are well down the road towards everyone with defined contribution pensions having freedom of choice in pensions that hitherto was restricted to more wealthy individuals.
So adaptation of your advice processes is now required following the issue of FG13/4 by the Regulator. We now know how you are expected to deal with those clients immediately affected by the announcements. We are left in little doubt with terms such as “must”, “should” and “may wish to” being used throughout the document, when referring to clients at different stages of the advice process.
Looking further ahead, we now have what can best be described as a holding period lasting to April 2015, when full blown freedom comes into being.
The changes summarised in Figure 1. Under capped drawdown income limits of 0% to 120% of GAD pre budget, go to 0% to 150% of GAD post budget. Flexible drawdown rule changes mean the £20,000 pa minimum income requirement has been reduced to £12,000 pa. Very tasty indeed. But the really scrumptious bit follows in April 2015 (Figure 2), when the triviality rules disappear along with all drawdown restrictions allowing clients to withdraw as much as they wish when they wish, with up to 25% being tax free and the remaining 75% taxed at the client’s highest marginal rate.
Brilliant, let’s take out the entire fund and go for Buy to Let properties, or invest in gold, or what about a new car? All being suggested as good ways to spend our pension pots next year. For some that may well be their preferred option. For the majority though I suspect the need for some form of sustainable income will be the main priority. This could be achieved through combinations of products such as conventional and/or asset backed annuities plus drawdown to achieve a client specific minimum income requirement with the balance being accessed as and when required.
Hence the holding period for clients referred to above. Rather than make a once and for all decision that restricts their choice today, they could delay that decision completely or go into capped drawdown until next year when full freedom is expected to become law. New products may well emerge by then extending the choices further. The Revolution is here. Do not miss out on the opportunity.
Speak to your usual Prudential contact and find out more about Prudential’s pre and post retirement solutions.