Pension Innovation 2014

Published / Last Updated on 20/05/2014

Pension Innovation 2014.

Pension Innovation On New Retirement Rules 2014

As predicted by us, pension firms are starting to innovate in an effort to attract pension money given that lots of traditional pension annuity companies have seen business slump by 30-40% since the Chancellor announced in the March 2014 Budget the people would be allowed to withdraw the whole of their pension fund if they want to from April 2015 and be taxed at usual income tax rates.

Two firms have launched 1 year annuities – to try and attract money now i.e. pay the annuity for a year and then offer flexibility to transfer the balance out, take an annuity or use full drawdown in 2015. To be honest, we have looked at these options and found that the returns offered less fees and commissions (if you deal direct with no advice) are very poor and result in a capital loss, although if you want the flexibility and are prepared to accept a small loss then maybe this is an option to have income now from your pension but not be tied in.

In another example, a firm is offering a drawdown plan where you can withdraw as much as you wish under the new rules but also with an underlying guaranteed income from pension fund that remains in the plan

  • Aged 55 – 64 = 4% of fund value as a guaranteed income
  • Aged 65 – 69 = 4.5% of fund value as a guaranteed income
  • Age 70 – 74 = 5% of fund value as a guaranteed income
  • Age 75+ = 5.5% of fund value as a guaranteed income

They will even offer an additional increase in the guarantee by 2.5% each year for the number of years invested before you take the benefits e.g. 10 years X 2.5% = 25% increase so the 4% guaranteed income above for a 55-64 year old is increased by 25% to 5% guaranteed minimum income.

The issue with this scheme is really about set up fees and management charges on the funds, which in our opinion at up to 1.7% initial charge and yearly contract management charges up to 0.55% and a fund management charge up to 0.7% meaning a total yearly charge up to 1.25% pa. Compare this to no initial charges and an annual management of 0.4% for some pension schemes that we use, the cost of the guaranteed income gets lost in charges.

We expect pension innovation in 2014 and 2015 to develop rapidly.

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