government’s pension reforms have arrived – and attention has inevitably shifted from the technicalities of the new rules to what those at retirement will do with their new-found freedoms. The reforms have given people unprecedented control over their pensions: you no longer have to buy an annuity, you can keep your money invested and take an income, and you can even withdraw all of your pot as a lump sum, subject to tax.
There’s a huge amount of noise in the market at the moment, but most people will likely spend a month or two assessing their position before acting. In fact, we probably won’t see the true impact of these changes for several years. But my fear is that, if people use these freedoms without advice and withdraw big chunks of capital, we’re looking at a huge hole in private pension savings in a generation’s time. Ultimately, if private pensions are spent, and customers don’t have the savings to sustain themselves in retirement, the state will have to step in.
This is not an argument against the reforms. If someone has a small pot of under £50,000, say, it would not buy much by way of an annuity anyway. The problem comes when people with mid-sized pensions of over £100,000 draw down excessive income or withdraw very large amounts of capital. These are viable pots of money, and the tax levied on withdrawals is probably not enough to dissuade people from acting.
Given this, I’m concerned that some will not pay sufficient attention to how they can sustain their capital over their retirement. Realistically, many will still want to buy an annuity at some point. The positive side of the reforms is that they can keep their money invested for longer, and then access a better value annuity when they’re older due to mortality gain. But if that individual is cashing in investments to take an income, the purchasing power of their pot may well decline over time, meaning that they do not benefit from this mortality gain.
This is where I think structured products can come in. Structured products admittedly have a poor reputation, but people in the industry are increasingly open to their role in pensions. It’s an intermediated market, and you would only access structured products through an independent financial adviser or a private bank.
They should not be seen as an alternative to equities or bonds, but they could hold some advantages for investors in retirement. In very basic terms, a structured product in this context would pay a certain percentage in income and return capital in full at the end of the term, provided that the FTSE 100 doesn’t fall by more than half. This allows the individual to mitigate the market risk of being fully invested in just equities or bonds.
Since pensions have become such a complicated minefield, it’s vital that people do access proper financial advice when making decisions about their retirement. It’s encouraging that the government’s Pension Wise guidance service is getting enquiries and that life companies are assisting where they can, but the failure of politicians to ensure that everyone accesses proper financial advice at retirement will cause massive issues.
There’s a big difference between sitting down with an adviser and receiving holistic advice about your whole financial situation and getting guidance on what they can and cannot do.
Gary Dale is head of intermediary sales for Investec Structured Products. The opinion expressed is for information purposes only and should not be construed as advice of any nature.