The Dozen Words that Changed the Pension World Forever

“Let me be Clear. No one Will Have to buy an Annuity.”

George Osborne

2014 Budget Speech

James Baxter

Managing Partner

Tideway Investment Partners

George Osborne’s budget bombshell shocked the pensions industry, handing more control over to pension savers and removing the need to buy an annuity.

Before the speech was even finished 50% had been knocked off the value of two of the UK’s listed specialist annuity providers.

Regulatory pressures on insurance companies, increased longevity and historically low interest rates have all combined to make annuities an extremely expensive product. They were never that popular and already looked inflexible and outdated as the way to deal with modern retirement.

The rule changes made draw down significantly more attractive and the endorsement of drawdown and simultaneous slur on annuities has meant that all pension savers will now want to consider this option.

Buying an annuity in future will be for a small minority of investors who really value the guarantees they offer and don’t mind the significant costs to get those guarantees.

The majority will likely want to exploit the new rules and treat their pension savings like the rest of their money in ISAs and general investment accounts, holding their own risks, investing sensibly and spending it as needed.

So as the new rules come in the two key challenges facing those retiring will be:

1. How to make the best use of each of the various tax wrappers and tax allowances to minimise the tax on savings and investment profits?

2. How to invest sensibly, what for most will be irreplaceable capital, to generate steady income and protect this against the long term impact of inflation.

On the first point we are now advising our clients to withdraw from their pensions the most tax efficient withdrawals, rather than simply what they need to spend.

Pension accounts are very tax efficient in accumulation mode, but less so in de accumulation and are beaten hands down by ISAs and in many cases simply holding the investments directly.

‘Collapsing pensions as quickly as is tax efficient to invest in ISAs and use personal allowances, particularly to Capital Gains Tax will be a risk free way of lowering your future tax burden’

In both cases the ongoing tax can be lower than in a drawdown account where all capital and profits will ultimately be taxed as income. In doing so we look to maximise the amounts they accumulate in ISAs to avoid future tax and give access to tax free capital. And then to set up their spending withdrawals from their general investment accounts where the amounts withdrawn will not be subject to tax.

On the second point investors with irreplaceable capital and needing to make regular withdrawals need different investment disciplines to those who are accumulating capital and regularly saving.

These later investors can exploit market corrections, which are hugely damaging to those steadily withdrawing funds. We advise these type of investors to:

• Limit equity exposure to lower volatility and protect capital.

• Focus on higher yielding equities and bonds where the secure income yield is ahead of inflation after fees.

• Hedge a portion of the portfolio against market down turns and rises in interest rates.

If these two disciplines of tax efficiency and prudent appropriate investing are maintained pension drawdown accounts can deliver significantly higher life time pay-outs than annuities without the high costs of guarantees and without gambling with how long you will live.

ABOUT TIDEWAY

Tideway Investment Partners are advisers and investment managers specialising in generating income and delivering consistent and lower volatility returns.

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Tideway manages the Global Navigator Fund, an absolute return fixed income fund which has delivered 11.2% p.a. return since launch in September 2011

(FETrustnet 19.6.2014)