Uncertainty over pension taxation rules is highlighting a growing need to shift retirement planning to include wider considerations of ‘capital drawdown’, Key Later Life Finance says.
The UK’s leading equity release adviser believes people planning for retirement, and their advisers, need to reevaluate the role of all capital including property wealth as speculation builds about potential changes to pensions in the October 30th Budget.
Budget rumours are pointing to possible future restrictions on taking tax-free lump sums of up to 25% from pensions to a possible limit of £100k, and even changes to tax relief on contributions.
Key believes any restriction on taking tax-free lump sums will drive changes in retirement planning and is urging savers and advisers to look beyond pension drawdown to embrace the broader philosophy of capital drawdown focusing on all assets and particularly property wealth. Key is pushing for the value of residential property owned by people being considered as part of guidance services such as Pension Wise.
Financial Conduct Authority retirement income data* for 2023/24 shows a 20% rise in the number of pension plans accessed for the first time to 885,455 from 739,652 underling how many people are using pensions to manage their financial needs in later life. Data shows around a third doing so did not take advice.
A major financial issue for many in later life is paying off mortgages, Key says, and UK Finance data shows 60% of new mortgage borrowing extends beyond the borrowers’ 65th birthday.
Will Hale, CEO at Key, said: “Speculation about restrictions on tax-free cash is strong and changes look likely. Equity release is already for many the only viable option for paying off a mortgage or helping family with financial gifts.
“Rising numbers of over-55s are taking tax-free cash and many are doing so without advice underlining how important it is in helping over-55s to address a range of financial issues and how important it is that people get advice.
“Any restrictions on tax-free cash will shift the balance to property wealth and the equity release market. Advisers and clients should be looking at all capital when planning for retirement and making full use of property wealth as part of that process.”
Towards a better functioning retirement planning market
In addition to calling for its inclusion within Pension Wise, Key wants to see the value of residential property being considered by workplace retirement planning propositions and by all wealth managers/IFAs .
Key would like to see an acknowledgement from the FCA that the expectation, under the 2014 Mortgage Market Review, that most customers will have repaid mortgages by retirement, is just not viable in today’s economic climate. Products exist now across the later life lending spectrum, encompassing RIOs, TIOs and LTMs, that that both allow customers to manage mortgage debts more effectively as they transition into retirement and then to access capital from the home as financial needs/wants change at older ages.
Advice and guidance propositions across retirement planning sectors need to catch-up to ensure all product options for customers are considered, as is required under Consumer Duty in order to deliver good outcomes.
