My last blog highlighted the major flaws in our current pension system that have led us to the position where most of us are in a pension scheme but we are still not saving enough to give us a secure retirement. If you haven’t read it (I’m hurt – but I’ll get over it) you can do so here https://richmondhousecs.co.uk/2018/05/10/a-job-half-done/
For the sake of brevity, let’s assume we have overcome our habitual under-saving and we are now all contributing the suggested amount into our pensions and we will continue to do so until we finish work.
Our next dilemma is how do we organise our retirement income?
In the bad old days (which is before April 2015 for the sake of this blog), the vast majority of us, saving in a workplace pension or other personal pension type arrangement, simply took our 25% tax free cash and then bought an annuity because that was the only real choice on offer. Income Drawdown (ID) was around but was generally only available to those with large funds who were prepared to put up with the complexity of GAD rates and 55% tax on death.
Then, in the blink of an eye, there was Pension Freedoms. The Government decided that if we had been responsible enough to save for our retirement, then we should be considered responsible enough to plan our own retirement income.
Rules were swept away overnight and we suddenly found ourselves in some kind of Hollywood blockbuster scenario where unseen powers told us that choosing Annuity was irredeemably bad and could only lead to the Dark Side, whereas choosing ID would not only mean we got the girl/boy but we would also avert major tragedies and earn the respect of our peers for evermore.
Of course, nearly everyone went the ID route. Some because they had considered all the options and made an informed decision but many because they were simply following the herd.
And here we are today in a situation where almost everybody goes ID and only a tiny minority choose Annuity.
Before going further, let me just remind you all that Annuity is generally a pre-set guaranteed income for life that, once set up, can’t be varied. ID, however, is using your pension fund like a bank account and taking what you want when you need it. ID gives you flexibility, better death benefits (in most cases) and treats you like an adult.
On the flip side, ID is not simpler than Annuity. It requires ongoing scrutiny and management to ensure it meets your current and future needs. And Annuity never runs out.
Which nicely leads on to one of the biggest problems with ID – sustainability. That is to say, how long it has to last. And this is factor number two – how long are you going to live?
If I had a pound for every time I’ve heard “If I knew when I was going to die, it’d make life a lot easier” or similar, I’d have probably £20 more than I do now. But the principle is there. We don’t know how long we are going to live and we generally underestimate when we do consider the question.
Accessing this kind of information can be difficult but now the BBC have come up with a calculator based on scientific data that can be found here http://www.bbc.co.uk/news/health-44107940
Go and have a look. I’m sure you’ll be surprised at the answer.
Don’t forget, however, this is average life expectancy. Individuals will fall in a wide band either side of the figure generated with some not making it to 65 and many reaching their 90s and beyond. Family history will play a part – but don’t read too much into it. My grandmother and most of her siblings lived well into their 90s, for example, but neither of my parents made it to 57.
That aside, you now have a more reasonable benchmark on which to base your plans. You know that, on average, your hard-accumulated fund now has to last you 25 years rather than the 15 to 20 years you were originally estimating. And that makes a big difference,
For those at retirement, they have to consider the income they will be taking more carefully. And for those yet to get there, their estimate of what they need to be saving need to be revised upwards.
There is a momentum building that is aiming to give ID on a DIY basis, where people can pick off the shelf investments to meet some nebulous level of sustainability. Frankly, I think this is a disaster waiting to happen. It ignores far too much that needs to be considered.
ID is right in many circumstances, but it is in no way a universal panacea. Going the ID route just because that is the prevailing opinion is hardly a reasoned decision. Your fund need to last a lifetime and choosing ID without advice is a potential disaster in the making.
For a complete consideration of your options, including a comparison against Annuity (which, shock horror, could actually be the right way to go) contact us on 0333 241 3350 or email info@richmondhousecs.co.uk
Peter Murphy Dip PFS
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned about the content hereof and any such action or inaction. Professional advice is necessary for every case. The value of your investment can fall as well as rise and you may not get back the full amount invested