To the surprise of many, especially in the financial planning world, George Osborne announced in his 2014 Budget what was to become known as Pension Freedom. This meant, above all else, that investors could take cash or drawdown on their pension funds rather than the sole option of buying an annuity.
Death benefits on pensions have typically been free from inheritance tax (IHT). As such, personal pension or SIPP funds are similarly free of IHT on death. The ultimate beneficiary would pay tax at their marginal rate on any drawings from the fund.
Pensions Freedom changed the proposition and income model for many advisers. The Baby Boomer generation had long been the client sweet spot for them. In 2015, when Pensions Freedom became law, the rump of adviser clients was at, or approaching, retirement. The 1% drawdown model become pretty much the norm for many.
In addition to the ability to remain invested while enjoying an income, the idea of passing the fund on death, IHT free, was a huge benefit to mass affluent or high-net-worth clients. Wise financial planners were advising their clients to draw from their ISAs and GIAs for retirement income while leaving their pension until last, in view of the IHT exemption.
The annuity, especially with higher bond yields, appears to be a very attractive option now
This changed dramatically in chancellor Rachel Reeves’ 2024 Autumn Budget. Pension benefits would become liable for IHT in 2027. Some financial advisers and providers have lauded the change, saying that pensions are for retirement income. This is an odd statement on two counts:
- Financial planning must be based on legislation and not on anyone’s political views. The legislation has been clear since 2015 and advisers have acted accordingly.
- Reeves’ tax change is vicious. Most inheritors, adding a pension benefit to existing income, will pay a cumulative rate of tax of 62% or 67% on this income. Beneficiaries of estates of over £3m could pay over 90%. £3m is not super rich if you have a house, a pensions fund and an investment portfolio plus chattels.
I, for one, will make no further SIPP contributions. There is simply no point. Of course, it might never happen – Sir Steve Webb thinks not due to the complexity of administration of estates. I hope he is right.
Moreover, the proposed legislation will have a significant impact on adviser-fee models and propositions. The annuity, especially with higher bond yields, appears to be a very attractive option now. We know from research that the majority would opt for a pension in the form of guaranteed income for life over a fund – unless it is called an annuity!
Reeves’ Budget and the Consumer Duty must surely lead to a significant increase in annuities, resulting in a hit on adviser fees.
Another change in retirement provision will also impact IFAs – if it happens. The Royal Mail launched the first CDC scheme (Collective Defined Contribution) on 7 October last year.
Not everyone in the industry believes CDCs are the solution to all our woes
The Government is a fan. The then pensions minister, Emma Reynolds, said: “CDC schemes are an important addition to the UK pensions landscape and, when well designed and well run, they have the potential to improve the pension outcomes for millions of savers in the future.”
CDC scheme members benefit from collective longevity and collective investment (at institutional rather than retail costs). I should add that not everyone in the industry believes CDCs are the solution to all our woes!
However, should they succeed, the traditional benefit consultant will regain some of the business lost to advisers with the death of defined benefit schemes and the rise of drawdown.
‘Peak age’ for prioritising retirement advice is 55, SJP finds
I will briefly mention one last change we really need to see across the pensions landscape – an emphasis on women’s pensions. Some interesting yet disturbing facts:
- 85% of women die as widows.
- 85% of annuities are single life.
- The average woman is on track to receive £12k per year of income, compared to the average man on track to receive £17k.
In short, women are short-changed on pensions. Anecdotally, advisers see the man in a family, leaving the women uninformed and somewhat ignorant.
Normally, the woman is the survivor – the last stop before inheritance. As a widower, I know what that means, from ensuring your will is up to date to making a list of contact details (including your financial adviser!).
So, my last message is: ensure the women in your client base are fully involved; ensure their pensions are treated as important as the man’s; and think how you can get the retirement message to more women in your community.
Clive Waller is managing director of CWC Research
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