Much has been written since the Chancellor's Budget in March; he stripped away layers of complex legislation and announced real freedom of choice for all at and in retirement. But what do the proposed changes mean for those of us who are still saving for retirement? Are the changes irrelevant for now, or should we be rethinking how we save for the future?
At Bestinvest we have always regarded pensions as the main savings vehicle to support retired life and have been frustrated by constant government meddling with the rules. It has often led to people losing faith in UK pensions and consequently not adequately preparing for their future.
Pensions are back in the limelight
We are hopeful now that the change in rules will go some way to reinstating pensions as the primary saving source for retirement and we argue that perhaps the most important consequence of the reforms is psychological. Pensions should be seen purely as a tax-efficient means of building a pot of money that will be used to support your lifestyle when you reduce or stop working; they are tax efficient because the government needs to incentivise people through the tax system to look after their future and ultimately not become a burden on the state.
In reality that is what a personal pension has always been. But the complex rules, and the requirement for many years to buy an annuity, together with the iniquitous way that you lose a lifetime's savings when you die with an annuity (assuming no spouse pension), all result in pensions being unloved. Swap the need to buy an annuity with being able to do what you like with your money and the whole proposition becomes a lot more interesting.
Is it time to rethink how you save for the future?
We believe that people will revisit pensions and that a sound savings strategy is to build up a number of savings pots: an ISA account, a pension account and possibly a general investment account to use Capital Gains Tax allowances. Significant sums can be accumulated in tax-advantaged portfolios and when the time comes to draw on your funds to support your lifestyle, the withdrawal strategy can be adjusted to ensure continuing tax efficiency as while pension income is subject to Income Tax, ISA withdrawals are tax free.
The key of course is to ensure that your savings are working hard for you and in that respect there really is no difference between an ISA and a pension investment. In spite of this, it is not uncommon to find people who are very focused on their ISA investments but seem far less concerned about their pension funds.
Invariably we see pension funds ‘left behind’ with old employers in funds with extremely limited information and visibility that haven't been reviewed for years. It is actually very simple and straightforward to move a pension fund to a SIPP (Self-invested Personal Pension) arrangement; we do all the liaising with the old schemes and there are no direct fees or upfront costs involved. SIPPs aren't suitable for everybody and before transferring you should consider any potential loss of benefits under your current scheme.
Don’t sell your future short
It is a simple fact that your future quality of life is directly related to the performance of your investments. The advantage of a SIPP, much like an ISA account with Bestinvest, is that you can see all of your investments in one place. This makes getting the right balance of investments for your needs much easier to achieve and allows you to fill your pension with those of the highest quality.
In conclusion we are very positive about the pension rule changes, as much for savers as those at retirement. Hopefully pensions will soon be regarded as what they should be: a long term investment account that will be used for your future. Nothing more complex than that.
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Bestinvest was voted low-cost SIPP provider of the year and our Best SIPP can help you get the most from your retirement savings. To find out more, download our guide to the Best SIPP.
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At Bestinvest we have the straightforward aim of helping you make the most of your investments, and our comprehensive range of services enables you to enjoy as much or as little involvement with them as you like. We spend every day talking to clients about their finances and the combination of our expertise, friendly team and market-leading service saw us voted Low Cost SIPP Provider of the Year and Self Select ISA Provider of the Year at the FT and Investors Chronicle Investment Awards.