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Embracing The UK's New Pension Freedoms - Debates From The WealthBriefing London Summit

Tom Burroughes

19 June 2015

Reforms allowing holders of UK pension funds to liberate their money and transfer it to a wider variety of heirs could be a boost for wealth managers so long as practitioners grasp the issues at stake, industry practitioners said at a recent WealthBriefing conference in London.

From the start of April, persons holding defined contribution and defined benefit pensions gained new freedoms, no longer required – subject to certain conditions – to buy annuities; they also have more freedom in how to pass on pension assets to heirs. These reforms have already caused a stir in the wealth management sector, potentially putting several extra billion pounds per year into play. (To see a feature about these issues, click here.)

Persons holding defined contribution retirement savings schemes will, from the age of 55, be able to take this money out and won’t be forced to buy annuities to provide for their old age. (Annuities are, due to high bond prices, expensive and widely considered to be poor value.) People can, if they receive professional advice, also move funds from defined benefit pensions and turn them in defined contribution schemes. The government has also changed inheritance rules so that people can pass on pension savings without the current punitive tax rate of up to 55 per cent. Wealth industry figures predict tens of billions of pounds could be reallocated into new investments – creating a potential bonanza for wealth managers. Less benignly, such a change could tempt people into unwise savings or, worse, improvident spending.

To discuss these issues and what they mean for wealth managers, a number of figures in the industry spoke at the 30 April WealthBriefing London Summit at the Guildhall. Speakers were Sean Jones, director, complex pensions specialist, Coutts; David Lane, technical director, Vestra Wealth; Nick Paul, senior financial planner, Turcan Connell; Daryl Roxburgh, global head, BITA Risk; and Aurèle Storno, chief investment officer, Lombard Odier Pension Fund – Lombard Odier Investment Managers.

Sponsors for the conference were Appway; Dubai International Financial Centre; Objectway; smartKYC; ProFundCom; Standard & Poor’s Money Market Directories, and K2.

Turcan Connell’s Paul reflected on the scale of the changes made and the direction of travel of recent years. “Pensions have changed dramatically in recent years. Pensions were traditionally intended to build a fund for retirement after a working life, lasting until the point of death, or the death of a financial dependant if later. Now, a pension can continue on after death, being made available to dependants or other non-dependent beneficiaries,” he said.
 
“It seems slightly unfair that pension legislation changes so frequently. People need to be informed and there is a need for advice,” he continued. “Over several years, many changes have occurred to restrict the tax reliefs available via pension funding, via reductions in the annual allowance and lifetime allowance,” he said.

Paul said it is crucial for the wealth industry to work alongside legal advisors; an existing expression of wishes document held alongside a pension fund (i.e. to express wishes as to what will happen to the pension fund on death) may now not be the most suitable, so individuals should review their expression of wishes, he continued.

“If people wish to commence drawing from their pension funds, they need to be careful… although we have entered the 'new world' for pensions since 6 April, with full flexibility in drawing from money purchase pensions, the old capped drawdown regime still exists…there is a huge number of individuals who are in this capped regime and they need to be aware of the consequences of drawing more than the capped amount,” he added.


Upbeat

Jones of Coutts was upbeat about the changes to the rules.

“It has become relatively simple…it (the pensions world) is getting even better. The old 55 per cent tax on top of a pension with drawdown has gone…that helps the inheritability of pensions,” he continued.

“The really significant change is the idea of non-dependency in pensions. Now, you can leave pensions to anyone you like. You can leave it to friends, cousins, and so on. It can only help people who can afford not to draw down on their pension. For those who can afford to draw money from a pension, the changes are quite remarkable. Already, it is changing behaviour,” Jones continued.

“We already plan for intergenerational investment….this (pension reform) adds a whole new aspect. The big pension funds have to match liabilities 30 to 40 years’ ahead and they have got that expertise. A private office, where people understand a whole family’s needs…they understand what is going on,” he said.

“There are a lot of people who will not take advice and it is hard to add value to people from advice where that wealth isn’t high enough…this is a massive issue and there are a huge swathe of people who could do with advice but can’t or won’t pay for it,” Jones added.

Lombard Odier’s Storno said wealth management has a lot to add to persons dealing with the new freedoms in terms of planning. “You need to understand tax but also talk about products and investments,” Storno said, adding: “If you have got advice for the long term then you need to stick to it...Short term change is where you can lose a lot of money. There is today a lot of pressure to change all the time.”

Roxburgh of BITA Risk said that understanding the implications of the reforms for individuals depended a great deal on the level of wealth.

“If you have more than enough wealth to fund your retirement, the tax changes are key, however there is a very large majority with low or borderline pension funding for whom the balancing of risks of investing, drawdown and lifestyle is critical to understand,” he said, continuing: “There is uncertainty over each element in this equation: market returns, lifespan and income requirements, even over the short term let alone the long time horizon over which a pension will be drawn down.

“If you are looking at 10 to 20 years out, market conditions will change…you are going to have to be flexible over what you do with your portfolio. As you look to go through 20 to 30 years of retirement, then it is a question of `what are my requirements and how are they going to change and who will manage my portfolio through this?’” he said.

“With annuities there was some certainty at retirement about the income you would receive…but now you need an understanding of the risks, which are not just market, but inflation, liquidity, longevity and sequencing and how these interact,” Roxburgh continued.

Technology can help in modelling and understanding the impact of factors such as longevity, inflation and market risk, he said, as well as the interaction between them, providing a test of the level of funding required. Another risk is what he referred to as “sequencing risk” – it is often not clear when the bad years in a market will come. Volatility can be magnified if a person draws down from a fund during a down-market. “Technology can help to crash-test an investment approach aiding the advisor and client (to) know what is possible,” he said.

Vestra Wealth’s Lane said a key issue that the industry must grasp is how people underestimate their lifespan.

“People drawing money in lump sums may not get as much money as they anticipate. Pension providers may need an idea of how much tax to deduct. People might be taxed at source more than they were expecting and may have to claw that back,” he said.

“If there are individuals who won’t or cannot pay for advice then the government will need to step in. This should be free at the point of demand,” Lane added.

(To see other reports from that conference, see here, and here.)