Don’t be put off by the maze of reforms – pay someone to help
PENSIONS are undergoing the most significant reforms in a generation, but don’t squander your savings – seek professional help.
The new rules are intended to give savers more freedom, as the requirement to buy an annuity at retirement has been scrapped. Instead, pension holders will be able to take all or some of their pension as a lump sum, and they can also choose to go into “drawdown”, which is a flexible way of accessing savings – but also more risky.
In a further set of complications, in last week’s Budget, chancellor George Osborne outlined additional changes. From April 2016, there will be a reduction in the lifetime allowance – or how much an individual can save tax-free over the course of their working life – to £1m.
The limit had already been reduced to £1.25m, down from £1.8m in 2011-12. The new limit may still sound like a lot of money, but those who diligently pay into a pension over several decades could achieve a pot of this size. Savings over the allowance are subject to a 55 per cent tax when the pot is accessed.
With all these changes, pensions are now entering uncharted territory. There is “sheer confusion” among pension holders, and seeking advice on how your savings will be affected is crucial, says Stephen Ford, head of investment management at Brewin Dolphin. “People clearly have savings but they also have a desire not to take advice and that is quite scary,” he says.
Karen Barrett, chief executive of unbiased.co.uk, which lists local advisers, emphasises there are now “more ways to get it wrong” with pensions. Moreover, given the length of time people save for their pensions, and the decades they hope it will last post-retirement, “any tax savings you can eke out are really important.”
FIRST PORT OF CALL
She says the first place to look for guidance should be the government’s newly launched service, Pension Wise. It has a website outlining details of the shake-up, and over 55s will be entitled to one free session with an adviser, either face to face or over the phone through the Pensions Advisory Service or Citizens Advice. However, only “guidance” rather than individually tailored advice will be on offer, so the service is best used as a place to swot up before paying for personal help.
The first thing to consider when looking for an adviser is whether they are classed as independent (completely unbiased), or restricted. Restricted advisers are either tied to certain product providers or they do not look at all financial products on the market.
For example, national adviser firm Towry is restricted as it does not advise on specialist investments such as structured products or investment trusts. While some people may not ultimately need to use specialised products, Barrett says it is crucial to go to an independent adviser first, to ensure all options will be on the table.
Financial adviser fees can seem labyrinthine in their complexity, but regulation introduced in 2013 states advisers must disclose charges upfront and provide you with a quote stating how much the help is likely to cost.
Many adviser firms charge a percentage of the total portfolio in question. Others, such as Saunderson House, have a fixed hourly fee depending on the service. Some have mixed charging structures, such as Smith & Williamson and Brewin Dolphin.
“Ask about ongoing fees, and if there are any other fees you have not been told about,” Barrett says.
Finally, remember financial advisers are legally bound and you will be able to seek redress if something goes wrong. “If the adviser gives you bad advice, you have some recourse. If you do something yourself, whether that’s online or by clicking something, you cannot reverse that decision,” says Barrett.