Changes to pensions

dunroving

dunstonh wrote: »

No different to the changed method except there were caps before.

Currently, the pension is invested tax free and outside of the estate. Why take it out of the pension if it is not needed?

So, maybe doing the phased drawdown method would be better (assuming she can afford the risks)

There will be no guidance on how this is done. That is for the product providers to decide. However, it will likely be similar to how phased drawdown is done currently except with an auto monthly payment facility.

Thank you, that is all very helpful. Before I reply to a couple of points it is worth noting this is someone who is terrified of the financial world and worried that being invested in anything but cash savings is risky. She really wants to have all of her investments in safe places (no risk of drop in value). This is non-negotiable on her part so no point in trying to persuade her.

I think she wants to take her 25% tax-free lump and put into (cash) ISAs because she is much more comfortable with this (cash, "bank account" type arrangement). As per your question ("Currently, the pension is invested tax free and outside of the estate. Why take it out of the pension if it is not needed?"), surely growth in an ISA is also tax-free, no? Plus she wants it in cash and I am not aware of many pensions that give decent cash interest rates ...

I am not familiar with phased drawdown. Is this a scheduled, agreed payment "contract" arrangement? If so, how much flexibility is there for example if she wants to change - increase or decrease - her income, for example like I mentioned, if she needs money for a new boiler?

[ETA: My comment about guaranteed guidance is from here: <<not allowed to post links, but the headline on the gov.uk site is "Millions guaranteed the right to free and impartial guidance on their new pensions choices" so should be easy to find via Google>>]

jem16

dunroving wrote: »

I think she wants to take her 25% tax-free lump and put into (cash) ISAs because she is much more comfortable with this (cash, "bank account" type arrangement). As per your question ("Currently, the pension is invested tax free and outside of the estate. Why take it out of the pension if it is not needed?"), surely growth in an ISA is also tax-free, no?

It is tax-free growth but it then becomes part of the estate in an ISA.

Plus she wants it in cash and I am not aware of many pensions that give decent cash interest rates ...

Unfortunately there are not many cash ISA rates that are decent either. Most do not keep up with inflation so she is losing money in real terms. if it's kept invested ( ie not in cash) in the pension then she could be achieving real growth and is not within the estate.

I am not familiar with phased drawdown. Is this a scheduled, agreed payment "contract" arrangement? If so, how much flexibility is there for example if she wants to change - increase or decrease - her income, for example like I mentioned, if she needs money for a new boiler?

Phased drawdown simply means that you only crystallise part of the pot as opposed to the whole pot. The part which is non-crystallised has better death benefits but can be drawn on as she likes, particularly after April 2015.

TA: My comment about guaranteed guidance is from here: <<not allowed to post links, but the headline on the gov.uk site is "Millions guaranteed the right to free and impartial guidance on their new pensions choices" so should be easy to find via Google>>]

Guidance means exactly that - a guide. It will not give advice as to what is better for your circumstances - you need to appoint an IFA for that.

dunroving

jem16 wrote: »

It is tax-free growth but it then becomes part of the estate in an ISA.

Unfortunately there are not many cash ISA rates that are decent either. Most do not keep up with inflation so she is losing money in real terms. if it's kept invested ( ie not in cash) in the pension then she could be achieving real growth and is not within the estate.

Phased drawdown simply means that you only crystallise part of the pot as opposed to the whole pot. The part which is non-crystallised has better death benefits but can be drawn on as she likes, particularly after April 2015.

Guidance means exactly that - a guide. It will not give advice as to what is better for your circumstances - you need to appoint an IFA for that.

Thanks, all advice duly taken on board. I wasn't thinking about the tax aspects of her estate. She doesn't have any children and she isn't loaded so I think for her, security of the capital is critical, and she just wants to be sure if she has any capital left when she dies that it goes to relatives (hence she doesn't want an annuity). When I explained what happens to an annuity when you die, she was in horror.

I have explained to her the various forms of annuity, including a fixed guaranteed term, but she is one of those folks who is just one step away from keeping her cash under the mattress! I have tried telling her there are relatively safe market investments but I don't think she would sleep at night if she thought her money was invested in anything associated with what she thinks of as the stock market.

I realise no "financial advice" will be given when new rules are brought in, I was thinking more about the fact the government seems to be indicating that free guidance will be given about the options and procedures, etc. I forgot that "advice" means something very particular in a financial context.

jem16

dunroving wrote: »

she just wants to be sure if she has any capital left when she dies that it goes to relatives (hence she doesn't want an annuity). When I explained what happens to an annuity when you die, she was in horror.

She's been able to do this since 2006 since it was not necessary to purchase an annuity.

The only difference that April 2015 will bring is the ability to take what you want, when you want.

I realise no "financial advice" will be given when new rules are brought in, I was thinking more about the fact the government seems to be indicating that free guidance will be given about the options and procedures, etc. I forgot that "advice" means something very particular in a financial context.

I think that's partly the problem as the government has not made it clear that guidance simply means presenting you with the options. A lot of people are expecting advice as to what is best and that is simply not going to happen.

mgdavid

dunroving wrote: »

My understanding is that under the current/previous rules, drawing down a pension was complicated. I have a friend who has a decent pension pot who does not want to purchase an annuity. She would like to first take her 25% tax-free lump and invest in ISAs, etc., and then gradually draw down the remainder, hoping she doesn't run out money before she runs out of life(!)

It still seems pretty unclear how straightforward it will be to withdraw periodic amounts from a pension fund, but I have read several promises that the government will provide guidance on how this will be done. April is pretty close but I still haven't seen anything. Anyone have any clues how easy it will be to draw income from a pension pot following the rule changes? For example, if my friend's boiler blows up will she simply be able to contact Aviva and ask for £3,000 from her pension pot to buy a new one? She is 63 and on state pension.

As already said, why take the 25% TFLS if not needed? But if she does then surely she would use this money as an emergency fund for boiler repairs rather than drawdown more out of the pension pot?

dunroving

jem16 wrote: »

She's been able to do this since 2006 since it was not necessary to purchase an annuity.

The only difference that April 2015 will bring is the ability to take what you want, when you want.



I think that's partly the problem as the government has not made it clear that guidance simply means presenting you with the options. A lot of people are expecting advice as to what is best and that is simply not going to happen.

Until I visited her a few months back and she handed me a drawer full of paper, she had no idea what she had, or where.

It's not so much that my questions are driven by the recent changes (although certainly the greater flexibility you refer to fits nicely into her situation) so much as she had a moment of panic when she realised how old she is, that her self-employed income is down to a couple of £k a year and she really didn't know what to do.

She had taken advice from IFAs on a number of occasions several years ago and "invested in something" but she didn't know what the "somethings" were or how much they were worth, or what she was going to do about her retirement other than receive her state pension.

I have been helping her figure out what to do next. We are very old friends and she knows I am not giving her financial advice but she literally doesn't know her ISA from her elbow. Basically I got her to transfer her cash (that was in pitiful ISAs giving about 0.25% interest) into higher-paying ISAs, consolidate other bits and pieces, and start thinking about how she will use her capital in an Aegon bond and an Aviva personal pension to fund her retirement.

mgdavid

dunroving wrote: »

......... I got her to transfer her cash (that was in pitiful ISAs giving about 0.25% interest) into higher-paying ISAs, ........

Before you did that did you consider the bank current accounts that pay much better than ISAs?
Santander - 3% on £20k
Nationwide - 5% on £2.5k
TSB - 5% on £2k
etc

Also First Direct Regular Saver - 6% on £300 per month for 1 year.

kidmugsy

dunroving wrote: »

She is 63 and on state pension.

Her best bet might be as follows. (i) Take her TFLS and stick it in an ISA - Cash ISA if she prefers. Or, much better, open a current account that pays a high rate of interest - these loss leaders should be exploited while they are around. (ii) She could "defer", i.e. suspend, her State Retirement Pension, and live off money from her private pension until she's run that down as far as she wants to. (iii) She could then restart her state pension, taking her reward as Extra Pension at 10.4% for every year she had suspended it. That's like buying an index-linked annuity on excellent terms.

The best argument against this scheme would be if she is drawing other doles that interact with pension deferral.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf


P.S. What on earth did you mean by "When I explained what happens to an annuity when you die, she was in horror"? What happens if you die earlier than expected is that the money goes to your fellow annuitants who live longer than expected. That's the mutual insurance aspect of annuities. Why is that horrible?

dunstonh

Whilst the media has focused on the risk based options that are changing, annuities are changing too and legislation has been changed there. So, improved death benefits will come with them as well.

dunroving

kidmugsy wrote: »

Her best bet might be as follows. (i) Take her TFLS and stick it in an ISA - Cash ISA if she prefers. Or, much better, open a current account that pays a high rate of interest - these loss leaders should be exploited while they are around. (ii) She could "defer", i.e. suspend, her State Retirement Pension, and live off money from her private pension until she's run that down as far as she wants to. (iii) She could then restart her state pension, taking her reward as Extra Pension at 10.4% for every year she had suspended it. That's like buying an index-linked annuity on excellent terms.

The best argument against this scheme would be if she is drawing other doles that interact with pension deferral.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf


P.S. What on earth did you mean by "When I explained what happens to an annuity when you die, she was in horror"? What happens if you die earlier than expected is that the money goes to your fellow annuitants who live longer than expected. That's the mutual insurance aspect of annuities. Why is that horrible?

It's not horrible so much as she just didn't like the idea that she might pay £100k for an annuity and die the next day, leaving nothing for her relatives.

I didn't know you could defer state pension after you already started taking it. I can suggest that to her (but I think she really wants to draw down her bond and personal pension slowly, so she leaves something if she dies). I don't know why, but for some reason I think she thinks she might die early.

With some people, finance just has to be simple (like putting money under a mattress). Even when we talk about it, she gets all worked up.

So even though "simpler" (100% in cash ISAs rather than putting some in other investments) may not be "better" financially, I just think she'd lie awake worrying if all of that money was in anything other than cash accounts. I've talked to her about inflation, spreading risk, etc., and she just gets worked up. So I just want to help her sort it out the way she wants to sort it out, in as simple a way as possible.

[sorry, I'm being dense - what is "TFLS"? I Googled it and didn't come up with anything to do with finance other than Transport for London pension scheme!]