Budget 2014 initial response
The recent Budget introduced dramatic changes to the options for defined contribution pension scheme members as they approach retirement.
While many of the proposed changes are still subject to ratification, this document summarises our immediate response to the Budget announcements and highlights what we're doing to ensure our customers understand their options and make the right decisions.
From April 2015, members will no longer be restricted as to the amount of cash they can take from their pension pot at retirement. The tax-free amount will still be limited to 25% of the pot but they can take as much as they want of the remainder although it will be taxed at their marginal rate.
This change opens up the options considerably, giving much greater choice and flexibility to pension savers than ever before.
Choices at retirement
Annuities, which have long been the only viable option for most, will remain the preferred choice for some. While acknowledging that low interest rates and increased life expectancy have conspired to drive annuity rates down, they remain the only sure way to provide a guaranteed income for life and, for many people, that provides great comfort.
Income drawdown is likely to increase in popularity. Traditionally, this is viewed as an option only for those with larger pension pots, where there is a reasonable prospect of achieving sufficient capital growth to provide a meaningful and sustainable level of income.
However, there is an immediate relaxation of the rules to make this a more attractive proposition: the minimum level of guaranteed income needed for flexible drawdown has been reduced from £20,000 to £12,000 a year, and the maximum income you can take for capped drawdown has increased from 120% to 150% of an equivalent annuity.
We have already amended our products and processes to deal with this (where those options are already available).
The limits for trivial commutation and taking small pension pots as cash were also increased to £30,000 and £10,000 respectively, and the number of small personal pension pots that can be cashed in was increased from two to three.
Consequently, more people now have the option to draw cash from their fund although they will obviously need to be mindful of the tax implications, and the impact this will have on their overall income in retirement.
In reality it is likely that retirees will use a combination of two or more options to achieve the level of income they need commensurate with the amount they've saved and any state pension to which they may be entitled.
Impact on investment strategy and options
The focus on pensions in the budget will no doubt prompt many schemes to review their investment strategy and their choice of funds.
Many, of course, operate a default strategy which usually involves a degree of lifestyling to reduce volatility in the later years. These will remain valid.
Lifestyle strategies have tended to be based on the assumption that the majority of people purchase an annuity. Now that this may no longer be the case, we're reviewing our lifestyle options to ensure they reflect the wider choices available.
We also need to look at opportunities for creating new investment vehicles for managing retirement savings in the decumulation period and perhaps producing income too. To this end, we're already working with our colleagues in Legal & General Investment Management to consider the options.
The importance of governance and control
To ensure contract-based schemes are set up and managed in the best interests of members, we established an Independent Governance Committee last year.
We were the first insurance company to provide this important facility and we welcome the Government's announcement that this will become mandatory for all providers from April 2015.
The Committee is carefully considering the impact of the Budget and will continue to act with members' best interests at heart.
Making our voice heard
We are also working closely with the government and regulators to ensure the changes are implemented sensibly and smoothly and will deliver the best possible outcomes for pension customers.
If you have clients who have recently purchased a Legal & General annuity and are still within their cancellation period, they may now wish to review their decision. If so, they should contact you or us immediately as once the annuity is in place it's irreversible.
Relaxation of the rules around pensions saving is great news for customers. It gives them much more choice and their money doesn't need to be committed to an annuity if that's not the best solution for their particular circumstances.
This is likely to encourage members to save more in their pot and to seek professional advice when it comes to taking their benefits.
The added buzz around auto enrolment means that company pensions have never been higher on the agenda and we want to reassure our advisers and customers that we're reacting positively to the changes which are destined to bring benefits for all.
As we develop our thinking over the months ahead we will continue to share this with you and would very much welcome your thoughts and ideas during this period to help shape our "new" solutions.