Beware the ‘risk of ruin’; Budget bombshell makes advice your best protection

The Budget announced by George Osborne on Wednesday 19th March 2014 proposed the biggest reforms to the way UK retirees will take their pensions.

Failure by pension providers and the insurance industry to give consumers a fair deal on retirement was highlighted in a recent FCA report and this surely has been a factor in the changes, described by the Chancellor as ‘the most fundamental reform to the way people access their pensions in almost a century’ being made.

At the heart of his announcement is the ability for Defined Contribution (DC) pension scheme members at age 55 to take their pension savings however they want them; they will not have to buy an annuity and can even take their entire pension savings fund in one go.

Whilst this big boost to the flexibility and choice pension savers have is very welcome, it makes it more important than ever that they understand all the options available to them and what the right thing is for them to do on a personal basis.

Get this wrong and pension savers will face what Jonathan Watts-Lay, Director of financial education and advice specialist, WEALTH at work calls ‘the risk of ruin’.

Watts-Lay comments, “In simple terms, this is when you’ve outlived the pension savings you have built up or put another way, you spent your retirement money too fast and then have to rely on the state pension as your only income. Right now there are limits on what you can do with your pension savings, even under the very generous transitional arrangements which come into effect now. The main risk at the moment is locking into a poor annuity rate which is an irreversible decision and can cost you many thousands of pounds over a long retirement. From April 2015 the risk of ruin is much more likely to be a factor when entire DC funds can effectively be cashed in.”

He adds “To make things even more difficult – the ability to take your entire pension savings as a cash lump sum doesn’t seem to depend on whether you do get advice or not or the level of knowledge that you have. I can see a lot of people misunderstanding things like income tax on their pension savings and wondering how they managed to end up as higher rate tax payers when they’d previously been in the basic rate band for their whole working life. And paying more tax than you need to will obviously have a big impact on how long your money actually lasts.”

The case for seeing a professional financial adviser then is even stronger than before the Budget changes were announced. With people living longer and many looking forward to a retirement that will last 20 years or more the decisions that are made should no longer be seen as a one off.

Watts-Lay said, “The options at retirement are complicated, not just by whether you want a cash lump sum or an immediate income but also by whether you carry on working part-time in retirement, have health issues or want to change your lifestyle. Your needs will certainly change during your retirement and it makes sense to get on-going support and advice to help you deal with changes. Think about your retirement as a series of decisions and have an adviser you can trust by your side”.

The message is clear, the new pension changes could be great news for DC scheme members; as long as they get sound advice about their options and understand the implications, then they shouldn’t face the ‘risk of ruin’ or an unwelcome tax bill; professional advice can help protect from the risks of this bombshell landing.

 

Beware the ‘risk of ruin’; Budget bombshell makes advice your best protection (546 downloads)

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