Emma Fitzmaurice of The Company SSAS Looks at Strategies for Income Drawdown
Amid concerns that not enough attention has been paid to the full impact of the new pension reforms, in particular the flexible access to pension income, I think it makes good sense to say out loud what most of us have been doing. Preparing and Adapting! Is it just me, or are we pretty accustomed to governmental pension changes and the potential for them impacting our industry?
The Post April Death Benefit’s proposition, in particular the notion that death benefits can pass tax-free from the pension pots of people below the age of 75 (irrespective of whether the member has taken Pension Commencement Lump-sum), encourages the longevity of pension pots. No longer is there the necessity to intricately balance the drawing of income, the paying of income tax, whilst staying within the maximum allowable pension, reducing the liabilities of tax on death and ensuring you have enough money to last you through retirement. Anything is simpler than that equation, right?
Getting the Pot Big Enough
Both SSAS and SIPPs are already geared up for pension freedoms. The proposed changes to taxation on death benefits only enhance their proposition to the masses. I think the true questions revolve around the ‘cradle to grave’ investment strategy. We are a generation that needs to save from a younger age and in a smarter way. I will leave that to you, the experts.
However, I do recognise that if income flexibility is the goal that many hope to attain, then it isn’t just about the wrapper, but also about the candy inside. What can be better than a 10p mix with all its variation compared to a one off 10p chew? So what happens when we want to have our sweets and eat them?
The self-invested pension world may be the first port of call when considering investments such as property. These sexy investments are not always conducive with income drawdown, particularly in the age of full flexibility with the appeal of being able to draw any amount at any time. This then leaves room for the spectrum of income producing investments that can aid against the erosion of a pension fund. This is an important feature in light of a more favourable death benefits situation.
Short–Term annuities. I hear a general groan at the word ‘annuity’ but there is value in the use of annuities in a number of circumstances. Offering a varied term of 3, 4 and 5 years, the short-term annuity allows for the security of a guaranteed income without the client being forced to make lifetime decisions with pension savings. This is useful when people are drawing benefits at the earliest opportunity (age 55 in most cases). Low annuity rates and increasing life expectancy will conspire to produce some relatively low annual income that they may not wish to be locked into. Used alongside a Self-invested pension with its capabilities for income drawdown, it may be possible to balance the risks associated with investment fluctuation against the affects of inflation and low annuity rates.
Variable Annuities. Whilst we are on the subject of annuities, it would be rude not to mention this relatively new addition to the family. Somewhat bridging the gap between income drawdown and annuities, the variable annuity allows for some flexibility and investment growth through a range of underlying investments. It manages to provide the certainty of guaranteed income with the potential for increased income if the investments perform well enough. Variable annuities guarantee income will not reduce below the initially agreed annual pension even if the investments do not perform, but a higher premium is to be paid for this and other such guarantees. The result of this may be a less favourable income at outset, compared to standard annuities.
Trustee Investment Plans. Trustee Investment Plans can and have been used to great advantage in SIPP’s and SSAS. They are more relevant now than ever, providing cash funds at a time when trust bank account interest rates are at their lowest and where more prominent (and sexy) investments in SIPP and SSAS, such as property, provide complications in liquidity in drawdown. Most providers offer a large range of funds to invest in and allow for switches and ad hoc withdrawals with no additional charges (subject to varying criteria). The beauty here is that rent generated from property can be invested on a regular basis.
Income Producing Funds. It is very possible that a self-invested pension already holds a versatile range of investments. Income Producing funds are often the next step in an investment strategy with members headed towards retirement and are exceedingly important if true flexibility is wanted. Investing in income producing funds allows for a diverse portfolio to be held with the balance of growth and cash generated hopefully matching the client’s requirements and being adjusted accordingly throughout the life of the pension scheme. A self-invested pension scheme can hold portfolios and individual equities so quite how self-invested a client wishes to be is really down to them.
Fixed Interest Accounts. Over the last decade, fixed interest accounts have maintained their place amongst the other SIPP and SSAS investments despite (or maybe because of) the fall in the current account interest rates. These should be considered in retirement planning because they provide a specified amount on a specified date depending on term and this makes for easy planning.
Pension professionals are always acclimatising to the needs of those facing retirement by following investor trends and keeping ahead of legislation. The current pension reforms offer no more of a challenge than any previous changes faced by the industry. Long term retirement planning will still be the main goal of the majority of clients in self-invested products and providing creative, intelligent and ongoing guidance will always be the best way for us to achieve this.