Taking your Pension – why the rules needed to change

In the most fundamental change to how people can access their pension in nearly a century, the Chancellor has announced a number of changes to the drawdown, trivial commutation and small pension fund limits. The intention is to provide more people with more flexibility to access their pension savings.

One of the most striking, and well publicised of the proposed changes, is that people will no longer ‘have to’ buy an annuity. For a considerable period of time annuities have been considered to offer poor value. Ironically, annuity rates (one of the measures by which they are judged to offer poor value) is by-and-large beyond the control of annuity providers. Annuity rates are typically driven by economic conditions and conditions over recent years have driven rates down. Quantitative Easing [QE] has been a major contributor to it and QE is not something that was dreamt up by the annuity providers; it’s a policy embarked on by the Bank of England at the behest of HM Government in order to try and get the economy moving.

Another key feature of an annuity is its inflexibility. This is something that has long been derided.

Remembering that the proposed changes are still in a consultation period, we hope that by relaxing the rules this unleashes the innovative potential of the annuity providers leading to products with more flexibility and better value.

We believe that annuities still have their place in retirement planning and the need for focussed in-depth financial advice will be even more essential should the proposed changes come into effect. There will be those people who will take their pension fund, spend the money, and worry about it later. For those who don’t spend it, and prefer to use it to supplement their income, there will be many decisions to be made. For example, where will they invest it; how much, if any, Tax will they pay on the income they receive from it, and will the money be at risk?

However, the main question is “when will the money run out?” Unless you know the date of your own death, this is impossible to answer; you will either end up with money left at the end OR you will run out of money. This is a daunting prospect for most.

Without doubt, whilst the consultation process takes its course, the area of ‘at retirement planning’ has just become even more complicated. We welcome change in this area and hope that the end result is positive for consumers and not just a cynical way of accessing higher amounts of Tax for HM Inland Revenue.

Only time will tell.

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What is forward guidance?

Since 1997, the Bank of England’s Monetary Policy Committee has set a Bank Rate for the month ahead at its regular meetings. The US Federal Reserve and the Bank of Canada have for a while been saying what they intend their interest rates to be in the future but the Bank of England traditionally never set out its’ long term plans. However the new Bank of England Governor (Mark Carney) has been a pioneer of the approach to monetary policy, which is known as ‘forward guidance’.

Forward guidance simply involves a central bank saying what it intends to do in future about its main interest rate or other aspects of monetary policy like quantitative easing (QE).  Guidance could be time-dependent, where the bank announces that it will keep interest rates unchanged until a specified date.  It could be condition-dependent, with the bank saying it will keep policy unchanged until certain conditions are met (e.g. unemployment falls to a specified level).

How people and firms expect interest rates to move over the coming months and years is crucial in determining what they decide to do about spending and saving.  Forward guidance can be used to affect what people expect. For example, if people expect interest rates to remain low, they may commit to household spending which they would not otherwise consider if they thought that interest rates were about to rise. The Bank hopes that by setting out their long term plans, this will give people more confidence both in their personal and business lives.

The aim of the ‘plan’ is to boost spending and aid the economic recovery but for the Bank to retain its credibility it needs to deliver on its promises and to be clear on the key issues that may change how the economy runs.

Many believe that forward guidance will replace QE; rather than buying government bonds of different maturities to push down longer-term rates, the Bank can commit to a Bank Rate level for a period of time and market rates will adjust to it. 

The US is the best example where the Fed has used forward guidance with growing boldness.  From December 2008 through to 2011, it used phrases such as “for some time” to indicate how long it saw rates remaining low.  In August 2011, it upped the ante by putting a specific date against low rates (“at least through mid-2013”).  Then in December 2012, it went further by attaching specific conditions against the period for low rates, announcing that they would remain low as long as unemployment remains above 6.5% and inflation expectations remained contained.

And this isn’t the only way in which the Fed is using forward guidance.  It has also attached conditional guidance to its quantitative easing programme.  Late last year the Fed announced that it would undertake 85bn of QE per month until the labour market improves substantially.  Recent statements suggest the Fed will maintain its QE programme through to next year until unemployment falls from the current 7.6% to 7%.

For households this could mean lower borrowing rates or at least borrowing rates that remain lot giving people confidence to make larger purchases for items such as houses, cars etc.

For businesses more certainty engenders confidence to invest in the business thus increasing potential for expansion, including expansion of the workforce.

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Optimising your Financial Potential

 

 

Optimising your Financial Potential

What do we mean by the phrase ‘Optimising your Financial Potential’?

Every client we meet is unique; everyone’s personal financial situation is different. Some have high earnings whilst others don’t. Some have accrued wealth whilst others are only just beginning this phase of their lives.

As Financial Advisers we take the time to understand each clients situation and, perhaps  more importantly, their point of view, aspirations and requirements.

Simply earning money or having money is not enough; it’s how that money is put to work that is equally important.

We look to maximise all aspects of our clients’ financial arrangements to give them the best possible chance of achieving their financial goals in the short, medium and long term.  For example:

·        Coherent Strategy:  A well laid out plan/strategy should be at the heart of everyone’s financial arrangements.

·        Tax Efficiency:  Use of Tax Efficient Savings such as ISA’s to shelter any gains from the Tax Man

·        Cost Effectiveness: Ensuring that any insurance arrangements are relevant and giving best value for money

·        Risk & Return:  Matching our clients to funds that reflect their attitude to risk. Taking too much or too little risk can be very dangerous

·        Cost Effective borrowing:  making sure that when borrowing money, our clients do so at terms that best suit their needs

·        Regular review:  A regular review of all arrangements is essential to ensure that all areas remain relevant and suitable

We are not interested in seeing a client once and then setting them on their way. We work with our clients on a structured basis meeting with them regularly (usually annually) to review the strategies we have put into place. This allows our clients to convey any changes to circumstances and requirements allowing us to make any changes necessary at the same time as checking that arrangements made in the past remain suitable.

This is the BLM way.

This is why clients speak so well of us.

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Optimising your Financial Potential