Tax-free cash and a volatile market; the benefits of a layered approach for a sustainable retirement income – Legal & General’s Cecilia Furner

by | May 26, 2023

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Written by Cecilia Furner, Distribution Director of Retail Annuities at Legal & General

Eight years on from the introduction of Pensions Freedoms, and we have seen how behaviour has changed when retirees access their pension pots. 

There is more choice than ever in how they access their money, but the question remains: are clients withdrawing at a sustainable level? And equally as important, with current levels of market volatility coupled with inflation risk, longevity risk, sequencing of return risk and the risk of the client simply changing their objective – how does this translate into meeting their plans for later life? 

No longer is there a “one size fits all” approach – people can take a layered approach to create an income that will last for decades. This might include buying a guaranteed income for life through an annuity, leaving parts of their savings invested while they drawdown an income, taking a tax-free cash lump sum of 25%, or a blend of all three. Rather than being a binary decision, between the flexibility of drawdown and the certainty of guaranteed income, these options can be layered to complement each other.


However, with the market volatility and investment losses of the last 12 months, retirees may have lost the appetite to stay fully invested. Meanwhile, the 25% tax-free option has remained a hugely popular benefit with customers, allowing them to pay for big ticket items or to pay off debts such as their mortgage. The maximum amount a client can take as a tax-free cash lump sum is the lesser of 25% of their uncrystallised rights or 25% of the lifetime allowance. Even though the Spring Budget started the process for the removal of the Lifetime Allowance, its level at that time will still be used for these calculations, meaning that maximum tax-free withdrawal will be frozen at £268,275. 

Financial planners need to remind clients that their actions could have unintended implications on their retirement for decades, particularly if they access more cash than they might need. According to research from Legal & General Investment Management, over 50% who withdrew their maximum lump sum said, on reflection, that they did not need to take that much out and could have left some invested until they needed it later. So clear communication at this stage is vital to help people fully understand the impact of their actions and the value of different solutions. Advisers can access Legal & General’s fair value assessments of its solutions through our adviser site

When carefully considered as part of a holistic financial plan, accessing tax-free cash is still a useful benefit. Clients that take the cash but do not go into drawdown immediately, or instead choose to get an annuity, can continue to work and save into a pension pot whilst benefitting from tax relief on those savings. This is useful for customers who, for instance, are looking to pay debts such as a mortgage. If they do take a pension drawdown income, they will trigger the ‘money purchase annual allowance’ (MPAA) which restricts their pension contributions eligible for tax relief. While the Spring Budget 2023 saw the MPAA increase from £4,000 to £10,000, it is still something to be aware of.


For clients looking to maximise guaranteed income, it is often still beneficial to take the tax-free cash and purchase a lifetime annuity. Annuities are the only way of ensuring a guaranteed income for life. Annuities also allow for more flexibility within a client’s wider portfolio and mitigate riskier investments. If clients are not ready to commit to a lifetime annuity, fixed-term annuities can help bridge their income over a shorter period until another source of pension income kicks in. We can already see that annuities are growing in popularity – our recent research found that nearly one million pre-retirees (those aged over 55 and still in work) are considering annuities for the first time due to improved rates and the need for more certainty. However, our research also shows there is still a lack of understanding about what an annuity is and what it can offer. Clients need to fully understand the questions it raises for their retirement planning: How can they maintain the real buying power of their income? How can they avoid poor value for money in the event they die earlier than expected? Are they getting an annuity that reflects their lifestyle and health? And simply, are they getting the best rate available? 

In a volatile environment, many clients will need additional guidance as the standard practice of recent years has been upended by investment losses. Advisers must be clear with clients and have evidence of the benefits of a range of products and solutions, and of a layered approach. Diversification is key. 

The regulator is currently conducting a thematic review of the advice consumers are receiving on meeting their income needs in retirement, following the government’s Pensions Freedoms reforms. This review will directly inform how the FCA assesses firms’ implementation of Consumer Duty, highlighting the need for advisers to ensure that any planning remains appropriate to the wellbeing of the client. Legal & General supported the launch of the ‘Consumer Duty and Retirement Income target market guide’, which focusses on what actions advice firms might consider taking with the new Consumer Duty, in light of evolving consumer needs.


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