The Financial Conduct Authority (FCA) has issued guidance to firms it regulates on how they should react following the changes to the retirement income market unveiled in the 2014 Budget.
Some changes to the rules on pension drawdown are already in force. Those with capped drawdown policies can access annual income equivalent to 150% of the amount they could have received from an annuity, up from 120%. Flexible drawdown, where the policy allows pensioners access to as much or as little of their pension fund as they wish, is now available to those with retirement income of £12,000 per year or more, down from £20,000.
From April 2015, the ‘do it yourself drawdown’ option will become much more attractive. Essentially, all clients with defined contribution pension schemes will be able to withdraw as much or as little of their pension funds as they wish. It is actually theoretically possible to take the entire pension fund as cash at the moment, however if more than 25% of the fund is taken as a lump sum, the excess over and above the 25% figure is subject to a punitive tax of 55%. Under the new rules, 25% of the fund can still be taken as a tax-free lump sum, with the remainder taxed at the client’s marginal rate of income tax.
Any client who has already bought an annuity, and for whom the cancellation period on the product has passed, cannot reverse their decision. However, there is still the opportunity to re-consider the advice in the case of:
- Clients whose financial reviews have not yet been completed
- Clients for whom the adviser is yet to send an application form
- Clients who have applied for a retirement income product, but for whom the cancellation period has not yet ended (some providers have extended their cancellation periods in light of the changes)
- Clients who have an income drawdown product in force
For these clients, if they used a financial adviser, then that adviser would presumably have advised them as to which was the best option for them based on the alternatives available prior to the Budget. Now advisers need to re-consider the advice given in the light of the additional options available.
Perhaps the most common change to what is considered best advice will be for those with income between £12,000 and £20,000 who were recommended either an annuity or a capped drawdown product. Flexible drawdown may now be the best option for them.
There may be some clients who were recommended either an annuity or a drawdown product who now wish to take their pension fund as cash. Careful consideration should still take place as to whether this is the best option, but anyone considering this will need to wait until April 2015 to do so. If they really do need their retirement income now, then for these clients, it is much more likely that the original advice will remain suitable.
For those already receiving income from a drawdown product, advisers should conduct annual reviews with these clients and consider at those reviews whether it is appropriate to take a higher level of income.
Clients approaching retirement may ask their advisers about the changes, and here firms need to make sure they totally understand the new pensions landscape.