Most of you will have been aware that the recent budget brought sweeping changes to pensions. I have overheard a few conversations where people have acknowledged a “big change for pensions in the budget”, but from what I can gather, the implication of the changes remains a bit of a mystery to many.
The Changes
For the uninitiated, pension legislation has undergone significant changes, which will be effective from next year. The Chancellor announced that savers would be able to use their pension pots as they wished and take a 25% lump sum tax-free. The traditional annuities – which are bought with pension pots and pay out a regular sum until death in exchange for them – are no longer a requirement. The announcement – we were told– was all about giving freedom to the saver to act as they choose in a free market.
As usual, it’s the sensationalist bits that people remember first. Pensions Minster Steve Webb famously commented that if people wanted to “blow their pension on a Lamborghini , then he was relaxed about that”. I think Mr Webb may have subsequently regretted that as a bit of a glib comment, the comment certainly crystallised people’s minds about the sheer amount of financial freedom they might have. And so it’s the Lamborghini comment that seems to have symbolised the new pension changes.
But let’s assume that most people won’t fritter away their savings quickly (although it could provide a welcome boost in terms of tax revenue for the Exchequer!). I think that the majority of people will want to understand how they can use this potential freedom to plan a better retirement.
What About Me?
Since the announcement in the Budget, I’ve had so many enquiries from people asking “How does this benefit me?” I always ask them the same initial question: “What do you want to achieve?” In reality we always do this when we talk about retirement planning, but now it’s more relevant than ever.
You can’t really work out how the new pension regime might affect you until you know what sort of retirement you want to have. Typically we use a “cash flow modelling tool” to help predict accurate income and expenditure in the future – even factoring in things like how often someone might want to eat out! Running these numbers is now more important than ever because when we have the output from this we can work with the new liberated retirement-planning market to plot the best course for the individual.
So, before you go Googling Lamborghinis, have a think about what great retirement might look like. You might not stretch to a fast car, but plan it right, and life could still be very rewarding