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24th Mar 2014
CTC's initial reaction can best be described in two words "At Last".
CTC has been deeply involved with Phased Retirement and Income Drawdown since their inception in the mid 1990's, and we have continued since then in the implementation of each creeping step of extra flexibility. Throughout, we have always held the belief that the features of Drawdown are as applicable to the mass market as they are to the high net worth individuals to whom regulators and advisers alike have restricted them.
The speed with which the Chancellor has introduced these changes will be a particular challenge, but undoubtedly this brings many opportunities to those who can respond swiftly. The changes represent a ‘reboot' of the At and In Retirement segments of the pensions industry. In many ways the main challenge facing the pensions industry will be to justify to customers the retention of post retirement monies within the Pensions Regulatory orbit. Winners will be those that can administer the increased flexibility and can offer access to client friendly planning tools supporting guidance through the new flexible options.
The software solutions CTC has already implemented and the software products it currently markets are primed for these new developments.
The Future for Annuities
Many will be surprised that the Chancellor has taken this rapid step to overcome the frustration that commentators, regulators and the government have been expressing at the failings of the annuity market. Nevertheless, annuities will still have a major part to play as it has never been more necessary to guard against life expectancy exceeding financial resources. Annuities will certainly still have their place, just not possibly as the whole solution. There are benefits in using part of a pot for annuities and holding part back in a drawdown solution. There will also be benefits in delaying the purchase of annuities and, within these scenarios, underwritten annuities will be increasingly the norm.
The Benefits of Drawdown
As we move away from a situation where retirement was seen as a fixed point in time and for most there was no choice but to purchase an annuity, it will be increasingly necessary to emphasise the benefits offered by drawdown. The last thing the industry needs is for "annuities for all" to be replaced by "everyone can take the cash".
Anyone with a pension pot of more than £40,000 would be most unwise to draw all the money at once as they face the possibility of some of that money being taxed at a higher rate. At the very least by phasing the crystallisation points people can ensure they stay in the lower tax rate bands.
Moving money from a pensions regime into the new ISAs will seem superficially attractive, but has IHT implications (although the government is consulting on the future death benefit regime). Taking the money to pay off a mortgage will seem attractive to many, however if the mortgage is to be replaced by some form of equity release only a few years later that may not be sensible advice.
Guidance at Retirement
It has been clear for some time that the present market place for providing information, guidance and advice at retirement is flawed. The government's suggestion that free face-to-face advice (or is it guidance!) should be offered - by the schemes or the providers - will challenge the current economic and pricing models of most products. It is an area where we can see considerable debate over the coming months.
Notwithstanding the outcome, CTC believes that our Retirement Planning software (the Retirement Hub) will have an increasingly important part to play in helping to provide the necessary guidance in a cost effective way. Where, in the past, a lot of concentration has been placed on the annuity wake-up process, all aspects of the options available will now need to be explained and this can be done within the design of our planning software.
An interesting challenge will be what to say to people retiring within the next year before the even more flexible regime comes in. Delay undoubtedly seems the best option and some providers will be well placed to offer suitable vehicles for this.
The ability to show how peoples' income in retirement may progress, taking into account all sources of such income , state pensions, DB and DC arrangements, ISAs and equity release in a single coherent fashion will be increasingly important.
Defined Benefit Schemes
In addressing Defined Benefit schemes the government would seem to have replaced an emphasis on flexibility with its continuing concerns for the budget deficit. The strain placed on the Exchequer by paying more transfer values out from unfunded schemes is understandable, however the suggestion that a ban on public sector transfers should be extended to private sector Defined Benefit schemes will not only remove flexible choices currently available to members, but also remove the ability of employers to financially re-engineer their schemes through enhanced transfer exercises or the flexible retirement options that are becoming increasingly popular.
Short Term Changes
If one is to welcome the longer term changes then one must also appreciate the extra flexibility being offered in the short term. However the short time scales suggested will undoubtedly put great pressure on systems and administrators. For customers using CTC systems we will be communicating over the next week as to the approach we intend to take. Our initial concentration will be on allowing our customers to benefit from the changes as quickly as possible, whilst continuing to meet existing deadlines for the April 2014 changes (for which we had somewhat more notice).
Playing Our Part - footnote to clients
As always with major legislative and regulatory changes CTC will be pleased over the coming weeks and months to meet and discuss the implications of these proposals. We will be explaining how we can enable you to meet the new requirements in the most cost effective and productive way.
CTC's solutions already have much of the flexibility to help our customers exploit the opportunities arising from the Chancellors' announcements. Our Retirement Hub innovation is well positioned to support assessment of the wider choices for individuals, and we are planning to bring forward some of the new features in a rapid response to the changes.
We look forward to working with you and helping you in your success.