Grasping the pension freedoms opportunities
Pension freedoms have increased choice but also introduced greater complexity into pensions advice. Smart advisers will grasp the opportunities and use technology to help them, writes Michelle McGagh
The change to the rules around pensions – the pension freedoms – present advisers with a vast number of opportunities, not least to extend relationships with clients and their families. But the changes also pose new challenges for them. How will they cope? One answer is to make more use of technology – from platforms to cashflow modelling and back-office systems.
The sweeping reforms have given clients the opportunity to access their defined contributions as cash. That’s the bit that has got all the headlines.
However it could be argued that the more interesting development is the change to death benefits.
Clients now have the ability to nominate whoever they choose as a beneficiary of their pension and the beneficiary will also pay a reduced amount of death tax; 45% instead of 55% until April 2016 and then tax paid at their marginal rate of income tax after this date. Of course the ‘death tax’ is only paid if the benefactor dies after age 75 – the money is passed on tax free should they die before this age.
The changes to death benefits have turned financial planning on its head. While pensions would have been the first port of call for funding retirement, now they are the last.
For high net worth clients who can fund retirement through other means, pensions are now an effective tax planning vehicle for multi-generational financial planning and more are expected to use pensions to pass on wealth to the next generation.
Pensions advice turned on its head
Alistair Wilson, head of Retail Platform Strategy at Zurich, says it could be assumed that there will be a shift away from annuities in retirement and towards drawdown coupled with other funding methods.
“We have a situation where the legislation moves at such a pace. Previously most advisers would have been in a situation where clients would go into retirement and that would mean buying an annuity,” he says.
“Before maybe 15 out of 100 clients would go into drawdown and the balance would go into annuities; I can see this turning on its head.”
Wilson sees a fundamental shift in the market place in which more of an adviser’s clients will settle on a different form of income generation in retirement. They key take away is that “pensions are no longer the sole route to income.”
Wilson thinks the reforms offer greater capacity for advice around pensions as well as inter-generational and multi-generational planning as pensions and inheritance tax (IHT) planning become more intertwined.
The first step is to look at which pots retirement can be funded from. And it’s here that Wilson believes technology can help.
“Advisers can see whether it is better, for example, to pull on the ISA lever to generate income and leave the pension lever alone.”
The death benefits changes, he believes change the dimension of financial planning quite fundamentally. “Keeping money in a pension under trust is a good idea if IHT is your sole concern,” he says.
Wilson believes that a platform allows those levers to be pulled more easily, drawing from unit trusts, ISAs, cash, stocks and shares as well as pensions.
“Platforms allow advisers to draw money in an order that minimises tax and maximises income within a level of risk that is tolerable to client,” he says.
Wealthflow LLP founder Duncan Glassey says another form of technology – cashflow modelling tools – can be vital for helping clients understand the impact of economic forces on their money.
“I don’t believe human beings can get their head around the impact of things like inflation and investment growth on their pot of money,” he says. “Unless you are using cashflow modelling, you are not giving proper financial advice in my opinion”.
Scott Gallacher, chartered financial planner at Rowley Turton IFA, agrees that cashflow modelling adds value to the client experience.
Gallacher says the technology he uses allows him to easily manage younger generations who may not be profitable clients as yet but will be in the future.
Gallacher believes the freedoms will mean advisers will now be faced with more clients wishing to pass their pension savings on to younger generations, meaning a greater need for advisers to be able to support inter-generational planning.
“Previously you could only get a proportion of your savings out of your pension so it was right to take it out sooner rather than later,” he says. “But now if you can get the pension out today or tomorrow then why take it out now? If you are under 75, don’t need it and have an IHT concern, then leaving it in is the best option. It’s a complete game changer.”
While some may be dubious about funding their retirement income from anywhere else than the traditional pension, he believes that providing information on all streams of money through a cashflow modelling tool can illustrate the need to look further afield.
“When you take out £20 to spend in the shop, that £20 doesn’t know where it has come from; but if the client takes the money from different pots they have different tax consequences.
“Clients come with preconceived notions and our job is to say “step back” and then find better ways to provide income in retirement and add significant value.”
Julian Sunley, founder of Sunley Financial, says technology such as platforms are central to adviser businesses for portfolio management but sometimes he prefers more traditional methods to explain financial plans to clients.
“Where you are trying to look at two things, such as retirement income and minimising IHT, it can be quite confusing for clients so I tend to draw a diagram with a pad and pen,” he says.
“I do all the complicated stuff in the office but when it gets to asking the client “what income do you need this year and which pot do you want to draw it from? It gets very manual.”
However, he says technology is beneficial for understanding the options available for clients and their families.
“We get a lot of clients where we look after their families and if you are doing lots of IHT planning you should be involving the children anyway,” says Sunley.
The advent of pension freedoms and the tax planning opportunities it presents are making it more important than ever to involve a number of generations in financial plans.
This growth of the financial family tree means it is even more important for advisers to use the technology available to them to manage financial plans that span generations and cross over different tax rules and regulations.
Wilson says the changes to pensions are nothing but positive for advisers who will have clients for life.
“That is what technology is doing for advisers; it is making financial plans more accessible for clients. The whole world is opening up. There are already opportunities in that space and there are more clients with more money to invest during their retirement.”
Michelle is a freelance journalist and previous editor of New Model Adviser