The Budget: What Was in It for You?

By Jeff Barnes

This year’s Budget was aimed at Britain’s “makers, doers and savers” and there were certainly a few bombshells in what has been called the best-guarded Red Book in years.

Key Facts

The 2014 Budget was designed for Britain’s “Makers, Doers and Savers”.

Changes did affect defined contribution pension arrangements.

A more flexible ISA regime was introduced.

The Chancellor announced tax changes affecting defined contribution pension arrangements, which look to scrap compulsory annuity purchase altogether and allow savers unlimited access to their pension pots. The finer details of this change will no doubt appear over the coming months. Essentially, it provides retirees with more choice but making the right one will undoubtedly require advice.

Assessing the new opportunity, experts have tipped a buy-to-let boom as people increasingly see rental property as a viable source of retirement income through to a flourishing multi-asset fund sector. ‘Lifestyle’ funds, a common default strategy for those buying an annuity, have had their suitability called into question. ‘Lifestyle’ approaches gradually reduce risk through their asset allocation as savers move from the accumulation phase (building up your retirement pot) into that of decumulation (income drawdown).

But if savers are more inclined to withdraw larger lump sums earlier, no longer fearful of hefty tax penalties, alternative strategies might be more suitable, such as using a multi-asset vehicle or entrusting your portfolio to a risk-targeted model portfolio designed to generate income, for example.

There are many investment options to research and significant tax implications that must be understood. The funds industry may see this as an opportunity for product development, aimed at would-be annuitants.

In few other Budget Speeches has the importance of financial advice been so explicit, with Osborne promising that “everyone who retires on these defined contribution pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have.”

Under closer scrutiny that will more resemble government guidance than “advice” and will be paid for by fees, rather than “free” but it highlights the importance of a helping hand to guide you through the saving and retirement maze.

A more flexible ISA regime, Junior ISA threshold lifted to £4,000, peer-to-peer loans included in the ISA allowance will all further boost UK personal savings.

But as always with investing, a solid understanding of the inherent risks is necessary to make the most of the new landscape.

Like the advent of a new year, the Chancellor’s budget typically prompts thoughts of making sure our financial plans are still on track. For most people, the budget usually results in a few minor tweaks. The changes announced in this year’s budget mean that many of us are likely to need a more thorough review.

Life After Annuities

Annuities have never attracted as many newspaper headlines as they have recently.

First, the review by the industry regulator, the Financial Conduct Authority, reported in Feb 2014 that – as many critics had thought for years – most people weren’t getting best value from their incumbent pension provider and would be better off shopping around.

Then came Chancellor George Osborne’s new rules threatening the annuity market as he introduced a series of tax changes, effective in 2015-16, increasing access to pension pots and reducing taxation which meant that “no one will have to buy an annuity”. Meanwhile, in the 2014-2015 Tax Year, the minimum income requirement for flexible drawdown is cut from £20k to £12k and other drawdown allowed up to 150% (was 120%) of ‘GAD’ benchmark annuity (Government Actuarial Department).

Annuity rates have halved in the last 10 years and while historically seen as the main option, providing a steady and reliable income in retirement, the returns are low and a long survival is usually needed in order for retirees to regain their investment. Hence the FCA review, which found 80% of people who bought an annuity would have been better off shopping around and buying one elsewhere, referred to as the ‘open market’ option, which supposedly would have given an average of 10% higher rate than their existing provider.

While very wealthy individuals have taken advantage of income drawdown options for years and low earners will likely rely on state benefits, those in the ‘middle’ will likely face the biggest-ever change to their pension arrangements. They now have more choice. This is only a good thing if you make the right choice – the need for advice is paramount.

Whilst buying an annuity is no longer mandatory, they may still be the right choice for some people. They exist in many different forms, such as investment-linked, joint life and impaired life or enhanced annuities (which may be appropriate if you have a particular health condition or are a smoker). Variable (or flexible income) annuities may grow in popularity as savers still want a level of security but don’t want to lock in income levels, but these introduce greater investment risk.

It’s important to remember that annuities are now just one option and with an increasingly varied landscape to navigate, we urge you to seek out good financial advice.