Another week, another change to the UK retirement savings environment – or at least, that’s how it feels! The latest changes to the tax regime tabled this week under the title ‘Pension Flexibility 2015’ were first published in early August, so this is more of a case of a repeat stress injury than a new trauma.
The changes are primarily focused on enabling the freedom of choice announced in the Budget. One aspect of these changes currently grabbing headlines, but that might not have received due attention in the midst of summer, is the ‘uncrystallised funds pension lump sum’ (subsequently christened the ‘FLUMP’ by Will Robins and Claire Trott). The FLUMP is the facility whereby 25% of each payment drawn from defined contribution pension savings is tax-free (while the balance is taxed as income). This type of tax treatment had previously only been accessible to savers able to bear the higher implementation costs associated with phased draw-down, typically those with larger accumulated defined contribution savings. FLUMP should bring this opportunity to all, assuming providers can support its implementation. The more common approach to draw-down to date has been to take the full 25% tax free lump sum at retirement. FLUMP allows defined contribution savings to remain (and hopefully grow) within a tax-sheltered environment for longer, if the saver so chooses.
The various changes to the retirement savings regime have certainly created the opportunity for Independent Financial Advisers (“IFAs”) and tax advisers to guide clients through the redrawn landscape. Retirement saving has become much more of a tax optimisation exercise than it was last winter, even if the underlying financial instruments used to implement savings plans have not changed. The products that providers assemble these instruments into might well change in the coming months to harness the tax optimisation opportunities created by the new regime.
Last winter was a period of much discontent within the IFA community as the consequences of the changes following from the Retail Distribution Review (“RDR”) manifested. The demand for IFAs’ services fell off and a substantial number of IFAs left the industry. The changes introduced since the spring might serve to reverse some of the impact of the RDR, as far as work and related fees flowing to IFAs is concerned. The changes cannot, however, alter the fact that savers have a finite pool of assets. This pool of assets delivers the savers’ ultimate benefits less the cost of advice (paid to the IFA). If the cost of advice is the same, whether charged implicitly via commission or explicitly as a fee, then the outcome for all parties is unchanged. What RDR did was give the saver the opportunity to choose whether the advice was something the saver valued and was consequently prepared to pay for or not. Freedom and choice in pensions is not a 2014-vintage concept but started some time earlier.
I don’t think that the Chancellor of the Exchequer set out to try court IFAs’ votes with this year’s changes. Stranger things have happened this close to an election though. He has, however, created a new opportunity for IFAs to demonstrate how advice might be of benefit to clients and consequently worth paying for. I might well exercise my new-found liberty and elect to pay for advice in order to better navigate this fresh world of freedom and choice in retirement savings – it sure beats having the spending decision made for me.
