17 October 2006
Winterthur Life is cautioning advisers to spell out to their clients the full implications of drawing cash from their pension fund. Despite the obvious attraction of a lump sum and its suitability for many, there are growing concerns that some funds will not generate adequate income in retirement as a result of taking the tax free lump sum.
This trend has been fuelled by large UK pension schemes announcing members will now have the chance to take 25% tax free lump sum and private pension investors rushing to take advantage of the option in case the government decides to abolish it.
Speaking at the Winterthur Life retirement options adviser workshop this week¹, Mike Morrison, pensions strategy manager, said, “Pensions are designed to provide a sustainable income in retirement, which might have to last 30 to 40 years in some cases. In effect, investors will only have 75% of their fund left to potentially produce the same income as 100% would have done.
“There may also be a more tax efficient way of realising the cash, as by taking it from a pension fund there is potentially a 35% tax charge on the rest of the fund on death. Since April there has been over a 60% increase² in the number of people using the flexibility of the new A-Day rules to draw income from their fund, which suggests a growing appetite in accessing the fund before the normal retirement date.”
Despite the Chancellor’s apparent backing for the tax free option, Morrison says there is a fear the government may however decide to remove the tax-free option, as it was described as an anomaly during the debate on the Finance Act 2006.
“Although a government might want to remove the option, it would undoubtedly be a vote loser,” suggests Morrison. “All political parties will tread carefully around the issue.
“Aside from it being a vote loser,” continues Morrison, ”the abolition of a tax-free lump sum would also cause those people relying on the money to pay off, say, a loan commitment to have to find an alternative savings vehicle.”
But Morrison argues that the introduction of personal accounts could bring the issue into the public debate. Personal accounts are likely to result in many people with very small pension funds. If everyone wanted to take 25% of their fund tax free, there would be a much smaller pot to provide an income in retirement. This would inevitably lead many to fall back on the state and means-tested benefits, defeating the whole objective of personal accounts.
Morrison adds: “Although little is being discussed on this at present, we should keep a watching brief. It could be something which comes up over the next year or so, particularly as the design of personal accounts start to develop.”
Morrison concludes, “Taking a tax free lump sum from a pension fund has long been viewed as a big benefit. It has also however attracted concerns and the new rules have only added to this. As a result advisers need to consider a clients overall financial position when considering recommending a lump sum. The facility can be attractive, but there can be drawbacks.”
¹ Winterthur Life is running a new series of workshops, entitled ‘Making the right choice at retirement’, to update financial advisers on new industry developments which have an impact on their clients’ retirement requirements. The 33 workshop sessions, conducted by Winterthur Life’s pension specialists Mike Morrison and Vince Smith-Hughes, are running throughout the UK and conclude on 15 November
² Source: ABI Q2 2006 Results
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For further information:
Paul Riddell Winterthur Life, Press Office +44 (0)1256 798099
Sandra Fulton Winterthur Life, Press Office +44 (0)1256 798310
Christine Wood Financial Dynamics +44 (0)20 7269 7253
Notes to Editors
About Winterthur Life UK Limited
Winterthur Life UK Limited is part of Winterthur Group, a leading Swiss insurance company with its international headquarters in Winterthur, Switzerland.
Winterthur Life UK offers pensions and investments for high net worth clients distributed via top tier IFAs and is renowned for its innovative approach to financial products. Its philosophy of transparent product propositions offers advisers a range of retirement and investment solutions with an open charging structure.
Winterthur Life UK is an experienced provider of single premium personal pensions, trustee investment plans and corporate pensions via IFAs and a leading provider of self-investment retirement plans like Self Invested Personal Pensions (“Sipps”).
Any opinions expressed in this media communication are made as at the date of publication but are subject to change without notice. Past performance is not a guide to the future. The value of shares/units and the income from them can go down as well as up. Exchange rate fluctuations may cause the value of underlying investments to fall as well as rise. Yields are not guaranteed and may fall or rise.
Winterthur Life UK Limited is authorised and regulated by the Financial Services Authority.
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Winterthur Group
Winterthur is the leading insurer in Switzerland, and ranks among the top ten all-line carriers in Europe. With a history spanning more than 130 years, Winterthur's life insurance, pension and non-life businesses are based mainly in Western Europe, but the group also has activities in Central and Eastern Europe, the US and Asia. Using a variety of channels, the group manages a balanced product portfolio for private clients as well as small and medium-sized companies. Winterthur operates in 17 countries, and has around 19,000 employees and 13 million clients worldwide. In the first half year of 2006, the group achieved a business volume of 18.8 billion Swiss francs, and reported assets under management of 157.4 billion Swiss francs as of June 30, 2006. Winterthur is a 100% subsidiary of Credit Suisse Group, a leading global financial services company headquartered in Zurich. Further information about Winterthur can be found at www.winterthur.com.
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