Increased optimism among pension savers
There is some good news this week that hints at increased optimism among pension savers.
Looking at our expectations for our standard of living in retirement, which took a battering during the financial crisis of 2009-10, there is evidence that the confidence of pension savers is on the rise again.
Prudential has done some number-crunching based on interviews with over 9,300 non-retired UK adults aged over 45, including 1,000 who are retiring in 2016. The results show a good improvement in our general expectations for how much we expect to have to live on in retirement.
On average, those retiring this year - the ‘Class of 2016’ - expect to have £17,700 in retirement income.
This is up 4 per cent on the average retirement expectations given a year earlier (This survey has been done in each of the past nine years). Those who retired in 2015 expected, on average, to receive just £17,000 a year.
Furthermore, more than half (56 per cent) of the Class of 2016 feel financially well prepared for retirement, which was another (albeit slight) improvement over the 54 per cent per cent from the previous year’s ‘Class of 2015’.
This is the third year in a row of growing saver confidence with regard to our standard of living in retirement.
A trend does appear to be emerging here, but mind you, this UK average expectation of £17,700 is still a full £1,000 shy of the peak level of 2008, just before the financial slump kicked in.
What it may also indicate, though, is that following the introduction of radical new rules on pensions, introduced on April 6 last year, pension savers may be getting their heads around at least the basic changes that have taken place. They may be gaining a more confident knowledge of the new freedoms they now enjoy.
At the centre of the new rules is this example: you are now free to draw down portions of your pension, or take all of it as a lump sum, with the first 25 per cent tax-free and the remainder taxable.
Drawing it all down at once may not be in your best interests, however, as you may have to hand over a good portion of your savings in tax by doing so.
Here are two strategies for drawing down your pension savings, to show how the tax bill involved can be minimised, under the new rules:
:: If you had a pension fund of £100,000 and you decided to take it all at once, the first £25,000 would be tax-free, while the other £75,000 would be taxable at your marginal rate, ie the same rate you currently pay on your salary;
:: A more tax-efficient strategy, if it suited your plans, would be to draw down your £100,000 gradually, at the rate of £10,000 a year over 10 years. This would come out each year as £2,500 tax-free, and then £7,500 taxable at your marginal rate. Provided you had no other income, your annual personal tax allowance would cover the £7,500, and you would have no tax to pay.
While the implications of the research above may show a growing confidence in the new pensions regime, there is still plenty of room for confusion and ill-informed decision-making by those who attempt to put together a drawdown strategy without advice.
The new pension rules have inspired many new products from pension providers, and companies offering alternative forms of investment for your pension savings – but the Financial Conduct Authority (FCA) has pointed out that the products can be complex and hard for consumers to compare.
The FCA has also warned that providers offering new products may give the impression that these are ‘default’ products, providing details only of products that they themselves offer, and failing to alert consumers to deals that could have been available elsewhere.
Consequently, the clearest message of all this week is that quality independent advice is more necessary than ever, for anyone facing into their retirement.
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005