There be Bear-Traps
On Wednesday 4th February, we held our Pensions Surgery at the offices of Vestra Wealth on Cornhill, London. We are very grateful to Vestra for hosting this most useful event, which was greatly appreciated by those ValidPath Members who attended.
The extraordinarily able David Lane guided us through the pensions reforms with the intention of highlighting the main risk areas for customers and...therefore...for their advisers.
Several things became abundantly clear through the course of David's presentation.
Firstly, the reforms present a substantial improvement in the treatment of death benefits, compared with the current regime - particularly before age 75, but also beyond that. The proposed facility for nominated drawdown raises the exciting prospect for cascading wealth down through the generations - this seems to tackle one of the key, and most pervasive objections to pensions funding which we have encountered over the years.
Secondly, whilst the new structures of Flexi-Access Drawdown (FAD) and Uncrystallised Funds Pension Lump Sum (UFPLS) present exciting options to consumers, in terms of how they manage and access their accrued benefits, the interactions of these vehicles, especially in relation to other benefits held elsewhere (especially where contributions are being made) do carry with them some pretty hefty risks that could easily unseat the unwary adviser. The Government, and the FCA are talking about 'guidance signposting' to guide consumers through what now appears to be an absolute minefield of choices, but it is difficult to imagine a situation in which good outcomes become the norm, other than under the auspices of expert financial-planners.
It was only a few years back, that the buzzword was 'Pensions Simplification'. It is difficult now to see any possible application of that term. 'Pensions Overcomplexification' might be a valid alternative.
Two key themes came out of David's presentation which I felt it worthwhile to highlight:
(1) The experience of the US decumulation marketplace
In the UK, we are moving towards the kind of model implemented in both the US and Australia. In the US, advisers and customers are currently wrestling with the issue of sustainability. Given the options available to pensioners in relation to their money-purchase plans, how do you minimise the risks of premature capital erosion? In the UK media, this issue seems to have taken the form of caricature (the idiot who spends his entire pension fund on a Lamorghini). This allows us the luxury of a little chuckle, but in so doing we may miss the real danger - that of unsustainable decumulation strategies.
The new decumulation universe absolutely demands the involvement of financial planners who have a sound grasp of cashflow modelling. Do you?
(2) The experience of the Australian decumulation marketplace
Over time, it has become apparent that, as a general rule, individuals underestimate the all-important factor of longevity. Couple this with equally general low-levels of financial literacy, and consumers' limited ability to compensate when things go wrong - and it is possible, with relatively little prophetic foresight, to anticipate that perfect storm as it approaches.
As a result of this combination of factors, there are (in Australia) the beginnings of a trend towards ensuring that 'baseline income' be secured. What does that look like in practice? Some form of annuitisation! Annuities insure the pensioner against the risk of living too long.
When George Osborne initially announced the pension reforms, the share prices of annuity-providers hit the floor. After a period of reflection, the balance may be refocussing on the value of new forms of annuity which de-risk the process of decumulation - for client and adviser alike.
2015 is the year of some of the biggest changes to pensions legislation that we have ever seen: are you ready?
ValidPath is holding its 'Pensions Special' CPD Event on the 4th March 2015.