The recent Budget saw changes to the pension rules allowing those retiring much more freedom to do what they want with their pension fund. Lib Dem pension minster Steve Webb made headlines when he said that pensioners were free to spend all their money on Lamborghinis if they wanted to.
London mayor Boris Johnston joined in the fun by telling foolish pensioners it was their own look-out if they ended up later living in rusted Lamborghinis dining on tins of dog food. While trying to avoid dramatic images of sports cars and Pedigree Chum, Number 10 backed up the pair by saying it was up to pensioners to decide what they do with their money.
This is a huge change for those approaching retirement. Previously it was a case of using the bulk of a pension fund to buy an annuity that,hopefully, would provide sufficient income for long enough. However, the relaxing of pension rules has those in the financial press predicting the death of the annuity. Possibly this is overstating the case as annuities are the ideal product for some people, depending on their circumstances. Equally, the ability to draw down your whole pension at once might be a very unsuitable option, depending on an individual’s situation, tax circumstances and the attractiveness of the pension wrapper.
What is clear – regardless of the circumstances – is more and more people are going to need proper planning input to decide what to do now they have more choice. Crucial will be the ability to assess the decision in the context of client-specific lifetime cashflow projections, whether or not that includes the purchase of a Lamborghini. In reality that big spend might look more like a long-planned round-the-world trip than a racing car. Nonetheless, expert advice will be necessary to work out the impact of such a large expenditure when considered against tax planning, risk attitude and a host of other factors. The good news is that while the Budget change might look radical when you consider lots of grey-haired racing drivers, it’s exactly the kind of thing that Robert Macdonald has extensive experience in. The Government introduced a variant of this concept , the Flexible Drawdown, in 2011 so it’ssomething professionals in the field have been considering for quite some time.
Whatever you are planning to do, consult an expert so you know exactly what your options are and what they mean for you.