Pensions

A lifetime approach to retirement advice

Unless funded by inheritance, the sale of a business or property (‘my business is my pension’ or ‘our home is our pension’), or the transfer of employer-funded Defined Benefit pension rights, retirement spending is a long process of ‘accumulation’ of capital through savings from earned income, followed, conventionally at the start of retirement, by some means of turning the resulting capital sum into an ‘income’ stream: a series of cash payment to meet outgoings.

This second, ‘decumulation’, phase was historically much shorter than the accumulation phase but with people living longer both stages could now be as long as 30-40 years. This has increased the merit of drawing down from capital rather than buying an annuity to secure from an insurance company a stream of cash payments for life. This potential gain in individual welfare was recognised by public policy in the form of new pension law in 2015 (‘Pension Freedoms’) supporting ‘drawdown’ from a personal pension arrangement.

At Fowler Drew we provide advice on the full range of pension and retirement planning issues at both the accumulation and decumulation phases. Our pension analysis and optimal decision making is an integral part of initial goal planning and a continuous source of added value in a discretionary management relationship.

Retirement as a holistic spending goal

When we talk about a ‘holistic’ approach to retirement funding, we mean that the goal should be planned in terms of total spending from all sources. After taking into account any contribution to spending made by the state or defined benefit employer pension schemes, the balance of the required expenditure will need to be derived from capital which may or may not be in a pension plan.

At Fowler Drew, a spending goal is planned and managed by applying a formal, mathematical or systematic approach based on modelling the factors that will determine outcomes, where the key outcome is safely sustainable real spending at every stage of retirement.

Advising the pension element of a spending goal

A pension is not an investment in itself. A pension account is simply a “wrapper” that dictates a particular tax treatment:
• what the wrapper holds as investments determine the gross investment return
• the wrapper determines the after-tax return.

The tax incentives come at the expense of accessibility. This is because the public-policy intention was to use tax incentives to encourage long-term savings and enforce the long-term nature with rules restricting access.

It follows that the role of pension accounts in the spending plan needs to be driven by tax but taking into account the inflexibility that the tax incentive comes with. This is not straightforward since not only do you need to consider the rate of relief that will be given on the contribution but also the likely rate of tax that will be paid when money is eventually withdrawn from the pension fund. With pension legislation in an almost constant state of flux these decisions can be challenging.

Pension freedoms

The 2015 pension legislation called by the Government ‘Freedom and Choice’, also known as the Pension Freedoms, has significantly increased the complexity of optimal choices about decumulation and forced a rethink of investment policy well before retirement.

With the new legislation, all previous restrictions on the amount that can be withdrawn from a pension have been lifted, except that access is still prevented until age 55. This is good news since it allows people to better tailor their pension withdrawals to suit their personal circumstances and tax situation and prevents people from sleepwalking into the purchase of a poor-value annuity product.

However, the different tax consequences of the various pension withdrawal options make the retirement landscape far more demanding:

• Flexi Access Drawdown
• Uncrystallised Funds Pension Lump Sum
• Flexible Annuity

Furthermore, the fundamental retirement challenge remains: how to maximise expenditure without running out of money before death. Exercising this choice about the means of draw and deciding on the right level of spending together make this one of the most complex areas of finance and it is almost certain to benefit from advice.

Transferring a Defined Benefit pension

To access Pensions Freedoms when you have a Defined Benefit (DB) or final-salary pension, you first need to exercise your right to transfer a capital sum, equivalent to your employer’s cost of providing the benefits, into a Defined Contribution pension plan. This right can be exercised any time in respect of deferred (or current) pensions up to a year from retirement (or at the employer’s discretion within a year). As long as the capital sum, known as the Cash Equivalent Transfer Value or CETV, for any one scheme is in excess of £30,000 you will need to have taken advice from a qualified adviser, known as a Pension Transfer Specialist, in a firm authorised by the Financial Conduct Authority to advise on transfers. Fowler Drew has these permissions.

Most individuals with deferred final-salary benefits from past employers are likely to have accumulated other savings, in or out of pension accounts, which can contribute to their retirement spending. With many DB schemes closed to new accrual of pension rights, individuals are increasingly building up personal or workplace Defined Contribution pensions. Proper planning of a retirement spending goal should already be holistic, encompassing all current and planned resources available to meet all spending.

Where the intention is to draw down from capital to meet spending, rather than buy an annuity with the capital, it is sensible to consider whether the overall plan could be improved by transferring DB benefits. Without an intention to draw down, a transfer is usually pointless unless you are very young but also not likely to be dependent on your DB pension when you retire. Even if the DB pension is retained, it is important the overall approach to managing retirement risks takes proper account of the risk free underpinning to total spending provided by the DB pension. This is only possible with a holistic approach to planning retirement spending. That is why we make full goal planning a condition of our providing transfer advice. It is unlikely we will be able to advise individuals who plan to manage the transfer themselves. We will not advise where individuals believe they know what they want to do and only want an adviser to rubber stamp their decision.

Advising on a transfer is heavily regulated, because of the significance of outcomes and the regrettable incidence of poor standards of advice across part of the industry, as well outright scams. Our 6-step process reflects the rules and guidance and how we wish to manage our liabilities for advice. It includes a ‘triage’ stage which we expect all clients and prospective clients to engage with before we agree to advise. At this triage stage we can only explain generic facts that will assist your decision whether to proceed to advice on whether to transfer. We cannot opine on or hint at the merit of the suitability of a transfer in your own circumstances without a regulated advice process. Though you are at liberty to use our Drawdown Planner remotely to try to replicate features of your transfer, we will not be able to help you verbally with that use if that were to cross the boundary between generic and personalised information unless an advice process is in place.

If you proceed to advice, these are the questions you can expect us to help you answer:

• How much is my CETV and is it unusually high?
• Is my existing investment strategy making best use of my DB income underpinning?
• Can better outcomes be achieved by transferring than by altering the existing strategy?
• Can any of the non-investment features of the Pension Freedoms be achieved by life insurance instead of transferring?
• What do these comparisons look like after lifetime taxes and IHT?
• If I transfer how would Fowler Drew manage the combined capital to deliver sustainable real cash flows when I need them and within the tolerances I set?