Realities of pension freedoms, a few months on.
We all know about pension freedoms now and what it allows you to do but what are people actually doing with this new found freedom? In reality not a huge amount, if I look at my existing clients and new clients over the last year many are making sure they will be able to access their pension if they need to but they aren’t actually going out and withdrawing their entire funds.
I have to be honest when I first heard of the freedoms and had time to reflect it did give me some comfort in that most of my advice to clients over the last 4/5 yrs had been to seriously look at drawdown and the flexibility it offered.
So far I have only had one client who has taken over and above the normal amount he would have been entitled to from his fund and that was only around 10% of his actual fund for a divorce settlement so more of an emergency really. Most of my clients have kept going the way they were when I first advised them or had advised them come their recently yearly review. They know the flexibility is there but they also know the money is for retirement and it has to last accordingly.
Many of my clients are in drawdown and I had sat down with them to really plan the income they should take and what they might want to leave in the pot so that it would last as long as possible, this really is the key to an effective drawdown plan. I have always felt that it was very important for clients to realise this money is there for their entire retirement but in a similar fashion they should enjoy it. An interesting meeting I had with a client was when they were going through their expenditure for the last year and saying they could save on this and not go on that holiday. I said ‘hold on a minute’ I am not here to help you live a worse life and lower your living standards, no, I want you to make sure you go on that holiday and have that gold plated back scratcher should you want it. We settled on the holiday for now.
I think now drawdown is the default options for most people with funds from £30k upwards, annuities have their place but only if there is a huge income increase based on ill health. Being in control of your money is something people really want and lets face it if you saved it you are going to be sensible in spending it as well.
But my money is not safe, Guarantees are something we all want but they cost lots of money, look at how low annuity rates are. Cautious funds really are that, very cautious, take a look at recent news in Greece and the drop of the FTSE most of my clients in cautious funds have gained back any losses they had over the last month already, once you have seen how funds work and experience them for a year or so then you will be comfortable and will not consider it a huge risk. Remember many people have been in funds all their life whilst they have been saving.
Some quick figures to show you how many of my clients funds have done over recent years. Average growth for cautious funds is 7% and balanced funds are 9% over the last 5 yrs.