The latest changes in pension law have received a lot of attention since the Budget, especially the new (or, strictly, relaxed) rules around drawdown. Much has been made of Steve Webb’s pretty questionable Lamborghini comments, with Boris Johnson picking up the baton in his usual ‘inimitable’ style, painting a picture of foolish pensioners living in a rusting status car while surviving on tins of dog food.
As a consequence, a lot of folk in the financial press have been predicting the death of annuities. For the record, there is nothing wrong with annuities per se, and I remain concerned about the historic anti-annuity bias in the advice industry (which I’m absolutely sure has nothing to do with their uncomfortable relationship with assets under management).
Like most established products, annuities have a purpose for somebody somewhere, dependent on goals, risk profile, underwriting considerations and all the rest of it – they are not ‘good’ or ‘bad’. Equally, the ability to draw your entire pension in one go may be good or bad depending on such things as tax status, the role of pensions in your overall finances, and the attractiveness of the pension wrapper as opposed to all the various other ways to hold your money.
Leaving the annuities issue aside, one thing which is certain is that in a climate where the government is double daring us to spend our pension on a sports car, combined with the inherently slippery concept of knowing how much income is ‘enough’, more and more people are going to need proper planning input on what to do with their accumulated pensions.
I’m sure there will be plenty of providers and intermediaries offering ‘drawdown advice’ to cater for this potentially juicy new volume market, but that’s not what I mean.
The most important thing will be to assess the decision in the context of detailed, client-specific lifetime cashflow projections.
This really is the only sensible place to start to work out the real cost of that Lamborghini (or any other large one-off outlay). The actual cost will be the change in your inflation-adjusted wealth over the rest of your lifetime. A long-planned round-the-world trip on retirement is probably a more relevant real world example. After that, decisions about, for example, marginal tax planning to maximise the net proceeds (which are nevertheless tricky and easy to get wrong) become secondary.
The good news is that financial planning firms are used to this sort of work and have had some practice, since the government was helpful enough to introduce this earth-shatteringly new concept in 2011 through the Flexible Drawdown regime. Interestingly, the original rules included safeguards against people splurging their pensions, unless they had enough income from elsewhere to justify such a decision. It seemed like a sensible idea at the time.