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How Does the UK Pension Drawdown Work? · Merryn Talks Money

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Speaker 1: Just Still author John's Depic.
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Speaker 1: this week we're not going to be talking about bitcoin, well,
1:25
Speaker 1: not on this bit of the pod anyway. We are
1:27
Speaker 1: answering another question about pensions, and I don't say another
1:31
Speaker 1: with exhaustion. I know it's very important and it's something
1:33
Speaker 1: that John and I get questions about all the time,
1:36
Speaker 1: and we want to make absolutely sure that when it
1:39
Speaker 1: comes to your time to dealing with your pension, you
1:41
Speaker 1: know exactly what to do. So this is the question
1:45
Speaker 1: that John and I get asked, possibly the most apart
1:47
Speaker 1: from should I buy bitcoin? But we're not touching that today.
1:50
Speaker 1: Here it is how does pension draw down actually work?
1:55
Speaker 1: You know, we hear a lot about pension draw down
1:57
Speaker 1: about how are we going to take care of our
1:59
Speaker 1: own money and our run up for a time, and
2:01
Speaker 1: that's our accumulation phase. Then we get to our decumulation phase.
2:04
Speaker 1: How on earth does that actually work? And how best
2:08
Speaker 1: can we manage it? Now? John and I of course
2:10
Speaker 1: are brilliant and all sorts of things, hugely knowledgeable, but
2:13
Speaker 1: on this we have had to pull in an expert,
2:16
Speaker 1: so here we have Stuart Trousse Stewart. Thank you so
2:19
Speaker 1: much for joining us. Stuart is the co host of Money, Money,
2:22
Speaker 1: Money on Switch Radio and author of the Bluffer's Guide
2:25
Speaker 1: to Economics. Although of course he had not a bluffer,
2:28
Speaker 1: he is an expert. He was previously a strategist at
2:31
Speaker 1: the European Bank for Reconstruction and Development. He's also e
2:34
Speaker 1: columnist for Bloomberg Opinions to do It. Welcome and thank you. Right, okay,
2:39
Speaker 1: so let's just get right in there. How does pension
2:42
Speaker 1: draw down actually work?
2:45
Speaker 3: The difficulty with pension draw down from an ordinary retire
2:50
Speaker 3: or prospective retires perspective is that basically all the risk
2:54
Speaker 3: is down to you, so you, you know, unlike having
2:57
Speaker 3: a final salary pension where the money just turns up
2:59
Speaker 3: in your out every month, so nice. You've kind of
3:02
Speaker 3: got to engineer how the money is withdrawn from your
3:06
Speaker 3: pot and ideally that you don't outlast your pot. That
3:10
Speaker 3: means you take on a lot of risks. So you
3:12
Speaker 3: take on the longevity risks simply that you last longer
3:16
Speaker 3: than your money does. The inflation risk. You've got to
3:18
Speaker 3: have a strategy for investing the money you don't need immediately.
3:22
Speaker 3: You know, the bottom line is you've got to decide
3:24
Speaker 3: on an appropriate level of draw down from your fund.
3:27
Speaker 3: So the way you can handle it is the classic
3:30
Speaker 3: thing is people some people take their twenty five percent
3:34
Speaker 3: of their pot tax free as a lumps arm to
3:37
Speaker 3: go and buy a yacht or a Lamborghini or holiday
3:39
Speaker 3: of a lifetime or more sort of more boringly, to
3:43
Speaker 3: sort of pay off mortgages than anything outstanding they've got
3:46
Speaker 3: prior to retirement, and then they put the rest of
3:49
Speaker 3: their pot into what's called draw down, and they decide
3:52
Speaker 3: on a sustainable rate of draw down, ideally with the
3:55
Speaker 3: help of a financial advisor. But a lot of people
3:58
Speaker 3: don't take that route. Some rules of thumb perhaps we
4:01
Speaker 3: can discuss later to as a guide of what's a
4:04
Speaker 3: sustainable rate. But there is one other strategy that combines
4:08
Speaker 3: the tax free cash and drawing down a regular income,
4:12
Speaker 3: because you can, instead of taking your twenty five percent
4:15
Speaker 3: tax free cash all in one go, you can take
4:18
Speaker 3: twenty five percent of each monthly draw down free of tax,
4:23
Speaker 3: and that allows you to take a much bigger income
4:25
Speaker 3: without running into sort of making yourself a forty percent
4:29
Speaker 3: tax payer and retierance stuff like that. And you know,
4:32
Speaker 3: obviously that's a big challenge in the way of the
4:34
Speaker 3: budget as well. You know, given the inheritance tax now
4:38
Speaker 3: applies to pensions, you want to be able to draw
4:40
Speaker 3: as much as you can from your pension if you've
4:42
Speaker 3: been fortunate enough to build up a big pot without
4:45
Speaker 3: paying forty forty five percent to withdraw it.
4:48
Speaker 1: Yeah, but the challenge, there's jud so so many places
4:52
Speaker 1: to go here. But let's star. Yeah, let's start with
4:55
Speaker 1: that inheritance tax point and whether you should take out
4:57
Speaker 1: the twenty five percent. It's not always twenty five percent
4:59
Speaker 1: any more, is it as capped? But that large tax
5:02
Speaker 1: free amount that you can take out immediately. Now, let's say,
5:06
Speaker 1: let's just say that you hit whatever it is you
5:10
Speaker 1: can start withdrawing from your pension. It's fifty five for
5:13
Speaker 1: some and then going up to fifty six, right, and
5:14
Speaker 1: then is it going to fifty seven like that? Yes,
5:16
Speaker 1: So it depends on which age you can take it.
5:18
Speaker 1: But you get to that age and you do not
5:20
Speaker 1: take out the twenty five percent, you decide to take
5:23
Speaker 1: twenty five percent of every income payment going forward as
5:27
Speaker 1: your tax free amount. If you get hit by a
5:30
Speaker 1: bus tomorrow, everything in your pension now becomes IHT liable,
5:37
Speaker 1: Whereas if you took the whole twenty five percent out
5:39
Speaker 1: at once and gave it to your children, then you
5:42
Speaker 1: would have avoided that bit of inheritance tax.
5:45
Speaker 3: Yeah, and I think you've you've just hit the nail
5:47
Speaker 3: on the head there actually, because if you simply take
5:49
Speaker 3: the twenty five percent tax free cash and leave it
5:52
Speaker 3: in your bank account, you know, economically, that doesn't change anything.
5:56
Speaker 3: But if you gift it, then yes, absolutely that's a
5:59
Speaker 3: game check. So you know, say you're talking about a
6:02
Speaker 3: million pound pot. You can take two hundred and fifty
6:04
Speaker 3: thousand pound out of that and gifted away, and your
6:07
Speaker 3: inheritance taxes is calculated on the remaining seven hundred and
6:11
Speaker 3: fifty thousand.
6:11
Speaker 1: You know, that is subject I just want to say
6:14
Speaker 1: quickly before I'm just saying that that is subject to
6:16
Speaker 1: the seven year uld. Did you get run over by
6:18
Speaker 1: a bus tomorrow, you're still subject to problem. Get away
6:22
Speaker 1: from buses, stay away.
6:24
Speaker 3: Yeah, no, no, yeah, you're absolutely right. That at least
6:27
Speaker 3: starts the process rolling. And you know, and to some extent,
6:31
Speaker 3: the tax free cash is is kind of more complicated
6:33
Speaker 3: as well, because that's not inheritable, do you know what
6:36
Speaker 3: I mean? A lot of tax allowances, especially between husband
6:39
Speaker 3: and wife, are inheritable, but your spouse or whoever you
6:43
Speaker 3: leave it to doesn't inherit your right to tax free cash.
6:46
Speaker 3: So that's what slightly changes the dynamic a bit, you know,
6:49
Speaker 3: And in some ways it's better to inherit a million
6:52
Speaker 3: pound in ices from somebody, although you lose the tax wrapper.
6:55
Speaker 3: You have to take that in cash unless you're a spouse,
6:58
Speaker 3: so you know, you could see you're already it gets
7:00
Speaker 3: really complicated because you've got a whole load of choices
7:02
Speaker 3: that most people just don't want to have. You know,
7:05
Speaker 3: the sort of pension freedoms ten years or so ago
7:08
Speaker 3: gave people a lot of freedom that they didn't really
7:10
Speaker 3: want to want to have.
7:12
Speaker 1: Oh that's sad, okay, right, Let's assume here we've decided
7:15
Speaker 1: we've decided not to take the twenty five percent up front.
7:18
Speaker 1: We've decided to leave it in the account, and we've
7:20
Speaker 1: decided that every month when we draw our income, twenty
7:23
Speaker 1: five percent of it will be the tax free part.
7:25
Speaker 1: Or I'm saying twenty five percent is shorthand by the way,
7:28
Speaker 1: we do know it's capped. We're just saying twenty five percent. Yes,
7:31
Speaker 1: the majority of people, it will remain twenty five percent.
7:35
Speaker 1: That sounds like admin. Hell, how do you do that?
7:38
Speaker 1: You simply say your provider do this for me? Or
7:41
Speaker 1: is there some kind of admin that you're required to
7:44
Speaker 1: do to make this happen?
7:45
Speaker 3: Yes, there is that been required to make that happen.
7:48
Speaker 3: But actually most pension providers will be able to set
7:51
Speaker 3: you up. So say, for example, you decide to take
7:54
Speaker 3: twenty five percent of each monthly payment free of tax,
7:58
Speaker 3: you can you can arrange for that to be paid
8:02
Speaker 3: regularly into your bank account with minimal interference. A problem
8:06
Speaker 3: comes when they have to decide what to sell from
8:09
Speaker 3: within your pension pot to provide you with a liquidity,
8:12
Speaker 3: so you can't completely get away from the problem. But
8:15
Speaker 3: most people can set it up so that they receive
8:19
Speaker 3: a regular amount into their bank account. The question is
8:22
Speaker 3: is whether that's too much now run out of money
8:25
Speaker 3: or too little and now pot will build up and
8:28
Speaker 3: up and up and now get hit with inheritance tax
8:30
Speaker 3: when they eventually die.
8:31
Speaker 1: But when you say they, you're referring to the provider.
8:35
Speaker 1: But let's say, for example, that you hold your SIP
8:38
Speaker 1: on a DIY platform, so maybe you all language landsown
8:43
Speaker 1: or I or something like that. How does it work.
8:46
Speaker 1: Then when you say they have to decide what to
8:48
Speaker 1: sell to create the liquidity and these circumstances, you have
8:52
Speaker 1: to do that yourself. So it's hard work.
8:55
Speaker 3: You're exactly right, and you know, I mean, this is
8:57
Speaker 3: a conversation I have with a lot of people, is
8:59
Speaker 3: that we may all, you know today, we may all
9:02
Speaker 3: feel on top of our powers, and you know, on
9:05
Speaker 3: top of our game and stuff like that, our appetite
9:08
Speaker 3: for complexity, you know, in our late seventies and eighties
9:11
Speaker 3: is going to be significantly diminished, even if we've got
9:15
Speaker 3: mental capacity. So you know, this is one of the
9:18
Speaker 3: problems with things like draw down. There's a lot of flexibility,
9:22
Speaker 3: a lot of freedoms to do stuff, but most people
9:25
Speaker 3: don't want those freedoms. So you can have it set
9:28
Speaker 3: up so you get the regular income. You can do
9:30
Speaker 3: the regular income even if you've taken all your tax
9:32
Speaker 3: free cash. It's just you can have a bigger income
9:35
Speaker 3: without paying a huge amount of tax. If you take
9:39
Speaker 3: a quarter of each monthly.
9:41
Speaker 1: Payment so it might make sense then, I mean in
9:44
Speaker 1: the accumulation phase obviously, you know, if you're diying in
9:47
Speaker 1: the accumulation is complicated. You've given eyels all the time,
9:50
Speaker 1: be careful of your investments, et cetera, but you don't
9:52
Speaker 1: have the same type of maths to do so. For
9:55
Speaker 1: most people, is it fair to say that it would
9:57
Speaker 1: make sense, if you've diyed through accumul perhaps to hand
10:02
Speaker 1: it over to a platform that will do the money
10:04
Speaker 1: management for you in the decumulation phase.
10:08
Speaker 3: Yeah, no, no, I think there's a case to be
10:12
Speaker 3: made for doing that. Another way people handle the complexity
10:15
Speaker 3: as well, is that the early years of retirement tend
10:18
Speaker 3: to be pretty expensive. In fact, spending in retirement tend
10:21
Speaker 3: to be a bit of a u shape. But you,
10:24
Speaker 3: I don't know, You still might have children on the
10:26
Speaker 3: balance sheet, and you might want to sort of buy
10:29
Speaker 3: yourself a little present for a lifetime working or something
10:32
Speaker 3: like that, or the holiday and what have it, whatever,
10:34
Speaker 3: whatever the cause, you spend quite a bit in the
10:36
Speaker 3: early years of retirement, and then you get to the
10:40
Speaker 3: stage where hopefully you're sort of still fairly fit, but
10:43
Speaker 3: your appetite for sort of trekking in the Himalayas or
10:46
Speaker 3: what have you, is not quite what it was when
10:48
Speaker 3: you were in your twenties, so you're spending goes down
10:51
Speaker 3: a bit. And then obviously the final years it's a
10:53
Speaker 3: bit of a lottery. You've got care and stuff like that.
10:57
Speaker 3: So what some people do is that they spend sort
11:00
Speaker 3: of in a more discretionary manner in the early part
11:04
Speaker 3: of retirement, and then when they start to get a
11:07
Speaker 3: clear idea of what their fixed expenses are, then some
11:11
Speaker 3: people buy an annuity to cover just those fixed expenses
11:15
Speaker 3: and then and you know, the rest of the pot
11:17
Speaker 3: is available to be drawn down if they need more
11:19
Speaker 3: money than that. But that's kind of a nice way
11:23
Speaker 3: giving yourself some certainty at a time when you're you're
11:26
Speaker 3: you're craving a lack of complexity in your life.
11:29
Speaker 1: Okay, that makes it. That makes a lot of sense.
11:31
Speaker 1: That's a really useful thought. The idea that your retirement,
11:34
Speaker 1: your retirement spending is is you shaped. So let's say,
11:39
Speaker 1: let's say, John, this is the last question I'm going
11:41
Speaker 1: to ask, and I'm handing over to you at the
11:42
Speaker 1: long list of questions I know you have about this.
11:45
Speaker 1: You don't, of course, you do, of course you. So
11:49
Speaker 1: let's talk about how we actually invest. So let's say
11:52
Speaker 1: that I am going to stay DIY at least maybe
11:55
Speaker 1: for the first ten years of my retirement. Maybe I'm
11:57
Speaker 1: only in my late thefties, and I'm pretty sure that
11:59
Speaker 1: I can do this my out for the next fifteen
12:01
Speaker 1: years or so. Do I just go out and buy
12:03
Speaker 1: a pile of equity income funds or equity income investment
12:06
Speaker 1: trusts or is that the wrong approach and I should
12:10
Speaker 1: just go straight into bonds and hold a pall of
12:12
Speaker 1: boring bonds forever. Not the bonds are always boring.
12:15
Speaker 3: There's so much to unpicking that, you know. It's a
12:18
Speaker 3: basic principle of investment. The amounts of risk you take
12:21
Speaker 3: is proportionate to your time horizon. So you know, if
12:24
Speaker 3: you're setting you know, if you're saving a lump some
12:27
Speaker 3: I don't know, to pay off for mortgage by a
12:29
Speaker 3: flat something like that in the next few months, you
12:32
Speaker 3: obviously don't want to take the risk of the market
12:34
Speaker 3: crashes and halves your capital, so you take zero risk
12:37
Speaker 3: your cash or short dated bonds. But as your time
12:40
Speaker 3: horizon lengthens, and especially once it gets past five years,
12:44
Speaker 3: which at least some of your pension pot will be
12:47
Speaker 3: designed to last for then it's appropriate to take more risk.
12:50
Speaker 3: And the question is how you take the risk with
12:52
Speaker 3: a pension Because you don't have to pay capital gains
12:55
Speaker 3: tax and stuff like that, you don't actually need to
12:57
Speaker 3: have income generating sets in that you can draw down
13:01
Speaker 3: on the capital gain. So you know, it's the old
13:03
Speaker 3: thing between being indifferent between an income and a capital gain.
13:08
Speaker 3: You know, if your wealth is risen by ten percent,
13:11
Speaker 3: it doesn't matter whether you've got ten percent of dividends
13:14
Speaker 3: or your the value of your assets gone up by
13:16
Speaker 3: ten percent. So to that extent, you don't necessarily have
13:20
Speaker 3: to restrict yourself to equity income funds on the one hand,
13:24
Speaker 3: And then you talked about bonds, and the natural thing
13:28
Speaker 3: is that as people get older, they de risk their portfolios.
13:33
Speaker 3: They have bigger holdings of bonds. But there's a massive
13:36
Speaker 3: difference between holding a bond, an individual bond, and holding
13:40
Speaker 3: a bond fund because the only way you get the
13:43
Speaker 3: good bits of bonds, you know, the fact that you
13:45
Speaker 3: know what you're going to get when they mature, and
13:48
Speaker 3: the regular income along the way is if you hold
13:52
Speaker 3: individual bonds to maturity if you buy a bond fund,
13:55
Speaker 3: you know, you're just as subject to the arbitrary movements
13:59
Speaker 3: and markets as an equity fund would be, you know,
14:01
Speaker 3: and people found that to their huge cost in say
14:05
Speaker 3: twenty twenty two, when inflation took off, interest rates took off,
14:09
Speaker 3: and bond funds got absolutely crucified. And so it really
14:15
Speaker 3: depends what you're going for. If you've still got an
14:18
Speaker 3: appetite for complexity, then you organize your bonds. You've got
14:22
Speaker 3: them running off at a regular period, creating a stream
14:27
Speaker 3: of coupon income and final redemption, so you can actually
14:30
Speaker 3: plan what's going on. You can't do the same with
14:32
Speaker 3: a bond fund. It's simply just another asset class that's
14:36
Speaker 3: subject to market movements.
14:38
Speaker 1: Okay, so going into bonds by yourself it's also very
14:41
Speaker 1: hard work.
14:42
Speaker 3: Yeah, No, it's very labor intensive. You're doing what a
14:46
Speaker 3: defined benefit pension fund manager would be doing, matching their
14:49
Speaker 3: assets and liabilities, and you having a nice ladder of
14:53
Speaker 3: bonds maturing at regular intervals, and you can have a
14:57
Speaker 3: spreadsheet or I'm sure there's more sort of exotic software,
15:00
Speaker 3: but from an individual investors' perspective, they can see where
15:04
Speaker 3: their incomes coming in each month, and they can engineer
15:06
Speaker 3: it so they get exactly what they want. And you know,
15:08
Speaker 3: they can even do fancy things by outside pension wrappers,
15:13
Speaker 3: by sort of buying low coupon bonds. So some of
15:16
Speaker 3: the return is in the form of capital gains. But
15:19
Speaker 3: do you know what I mean, you know, yeah, exactly,
15:22
Speaker 3: you're optimizing all the tools you've got at your disposal.
15:26
Speaker 3: Is it is mind blowing.
15:29
Speaker 1: So that there's a reason why people do this professionally, right.
15:31
Speaker 3: Yeah, oh, definitely, very much so, you know, but the
15:35
Speaker 3: issue between the difference between bonds and bond funds is
15:38
Speaker 3: a crucial one that you know, even a lot of
15:40
Speaker 3: financial advisors don't seem to grasp.
15:42
Speaker 2: And I think that's really interesting point that Manas kind
15:48
Speaker 2: of brought up. Is there difference between the accumulation and
15:52
Speaker 2: the decumulation fees. I mean, ultimately, accumulation can be quite
15:58
Speaker 2: easy if you really wanted to, then you can just
16:01
Speaker 2: stick your money monthly basis, save every month, stick and
16:06
Speaker 2: track your funds whatever. But you know, you start in
16:09
Speaker 2: your twenties, you get forty fifty years before you're retired,
16:12
Speaker 2: you can keep your portfolio being virtually the same kind
16:15
Speaker 2: of you know, between eighty and one hundred percent equities,
16:18
Speaker 2: probably for at least the first twenty years, probably for
16:21
Speaker 2: the first thirty if you want, and then you don't
16:24
Speaker 2: have to worry too much. But is this becoming very
16:27
Speaker 2: obvious from the conversation. The bit after that is actually
16:30
Speaker 2: really complicated because suddenly your time horizon completely narrows. You're
16:36
Speaker 2: suddenly trying to balance. It's not about saving as much
16:39
Speaker 2: as you possibly can. It's about trying to make sure
16:41
Speaker 2: that you use up as much of the port as
16:44
Speaker 2: you can before you die. Yeah, and you just don't
16:47
Speaker 2: know obviously, you don't know when you're going to die.
16:50
Speaker 2: You don't know what your rate of return is going
16:53
Speaker 2: to be on the stuff that's still in your portfolio.
16:56
Speaker 2: You only have a I mean, you barely know what
16:58
Speaker 2: your spending is going to be. And one thing I've
17:01
Speaker 2: noticed whenever I talk to the retired people is they
17:04
Speaker 2: are astonished by how much they spend, even though I mean, yeah,
17:08
Speaker 2: it's the U shaped thing, definitely, but it's also it's
17:12
Speaker 2: a bit like, you know, they're always complaining about how
17:14
Speaker 2: they don't have any time now that they've retired. And
17:16
Speaker 2: then also you know, they don't have any money either,
17:19
Speaker 2: or rather they spend more than they expect. I mean,
17:21
Speaker 2: so from that point of view, do you think there's
17:24
Speaker 2: a good case for even if you've been an independent investor,
17:29
Speaker 2: you're for your accumulation phase of opening an advisor, And
17:34
Speaker 2: if so, what other kinds of things you should look
17:38
Speaker 2: for in a wealth manager and maybe how much should
17:41
Speaker 2: you be expecting they pay for that? I know those
17:44
Speaker 2: are all those are both pretty tricky questions, but I mean,
17:48
Speaker 2: if you've got a rough view on your thinking there.
17:52
Speaker 3: You're exactly right, because you know, accumulation is completely different
17:56
Speaker 3: from decumulation, and there are all sorts of issues. You know,
18:01
Speaker 3: it's you've got pound cost averaging on the way in
18:04
Speaker 3: for accumulation that works in your favorite you know, very briefly,
18:07
Speaker 3: that's basically, the weaker the market is, the more your
18:11
Speaker 3: regular monthly contributions buy, the more units in funds. The
18:14
Speaker 3: mirror image of that is there when markets are really strong,
18:17
Speaker 3: you're buying fewer units, so on average, you're buying each
18:21
Speaker 3: unit at a lower price than you might otherwise have done.
18:23
Speaker 3: It's smooth things out and protects you against falls. And
18:27
Speaker 3: in fact, if you're really young as big stock market
18:30
Speaker 3: form might actually be a really good thing because you're
18:33
Speaker 3: going to put more in in future than you've done today.
18:35
Speaker 3: So that's the accumulation phage, and that's pound cost averaging.
18:38
Speaker 3: What we've just been talking about, what you've been asking about,
18:41
Speaker 3: is pound cost ravaging. And this is probably where you
18:45
Speaker 3: need the help because because basically, if the stock market,
18:49
Speaker 3: if the stock market falls sharply and you're just about
18:51
Speaker 3: to sort of you know, if you're say taking your
18:53
Speaker 3: annual income in one go, you know, just to sort
18:56
Speaker 3: of make the for the purpose of illustration, you're going
18:58
Speaker 3: to have to sell a lot more units in your
19:00
Speaker 3: pension fund to make however much you want to draw
19:03
Speaker 3: down from your fund. And that's where the professional advice
19:06
Speaker 3: can really help, because if you can take some of
19:08
Speaker 3: the pressure off your pension fund when stock markets are
19:11
Speaker 3: really weak, give them time to recover as they usually do,
19:15
Speaker 3: that will give you your fund a lot more resilience,
19:18
Speaker 3: and it's worth paying extra for that. The problem is
19:21
Speaker 3: is that basically, rather than simply giving you the advice
19:25
Speaker 3: setting you up with a sustainable plan and letting you
19:28
Speaker 3: get on with it, that financial advisors will want it
19:32
Speaker 3: to bring all your assets under management and charge you
19:36
Speaker 3: a fee appropriately, And that's a large part of the
19:38
Speaker 3: reason why, you know, people who haven't got enough assets
19:41
Speaker 3: don't interest financial advisors because two percent of nothing is
19:45
Speaker 3: still nothing, whereas people who've got very substantial assets, perhaps
19:50
Speaker 3: people who've used pensions of as wealth management in estate
19:54
Speaker 3: management tools, might have many millions in there, and two
19:57
Speaker 3: percent of that is a very substantial amount of mine,
20:00
Speaker 3: and probably considerably more than the advice they get is worth.
20:04
Speaker 3: So you do get caught in that situation. But if
20:09
Speaker 3: you derive quite a bit of consumer sort of joy,
20:15
Speaker 3: if you like, from having all this worry taken away
20:17
Speaker 3: from you, you know, it's difficult to put a price
20:19
Speaker 3: on that, especially if you're buying peace of mind by
20:22
Speaker 3: getting advice. You can also get free advice as well,
20:25
Speaker 3: you know, pension wise, there are you know that the
20:28
Speaker 3: take up of these services has been extremely disappointing from
20:32
Speaker 3: a government's perspective, and financial advisors are always quick to
20:35
Speaker 3: point out that the take up is quite low. But
20:37
Speaker 3: you know, you can have a free conversation about precisely
20:40
Speaker 3: these sort of issues with somebody who knows how everything works,
20:45
Speaker 3: and conhaps sort of sanity check what your plans are
20:49
Speaker 3: and make a few useful comments on that.
20:52
Speaker 2: The all the other thing I was going to ask
20:53
Speaker 2: about boys annuities and their rule and all this, and
20:58
Speaker 2: know that it can have briefly meant. But again, one
21:02
Speaker 2: of the reasons the pensions freedom came along in the
21:04
Speaker 2: first place is because people got annoyed about having to
21:07
Speaker 2: annuitize and obviously buy an annuity portshole down, et cetera,
21:12
Speaker 2: et cetera.
21:13
Speaker 1: And then they were so partly irritated not just by
21:15
Speaker 1: the annuities themselves, but by being ripped off by the
21:19
Speaker 1: annuity providers because they were obliged to buy annuity. So
21:22
Speaker 1: it was partly the system and partly the fact because
21:24
Speaker 1: they were obliged to do it and they almost always
21:27
Speaker 1: brought them from the same the provider that they'd been previously,
21:30
Speaker 1: they were almost inevitably ripped off. So that was a
21:32
Speaker 1: big part of the problem. Sorry to interrupt, No, I
21:35
Speaker 1: didn't you get that?
21:36
Speaker 2: Yeah, yeah, because I remember we always used to write
21:38
Speaker 2: a shop.
21:40
Speaker 1: Up around, shop around, but nobody did. They got these
21:42
Speaker 1: letters and and you know it said take care. They
21:45
Speaker 1: ticked there and that was that maddening.
21:48
Speaker 2: But yeah, no, I mean, obviously, then annuities became extremely poor,
21:52
Speaker 2: of how you because of the low interest rate environment,
21:54
Speaker 2: but that has changed now, so in terms of the
21:57
Speaker 2: role of an annuity and checking that you're getting a
22:01
Speaker 2: good value innuity, if you get any thoughts or kind
22:04
Speaker 2: of rules of thumb for going about doing.
22:05
Speaker 3: That, right, Yeah, No, no, definitely, because I mean, obviously,
22:09
Speaker 3: you know, annuities tend not to, even in good times,
22:14
Speaker 3: tend not to pass on a huge amount because you know,
22:16
Speaker 3: basically you lose your entire pension pot and you get
22:19
Speaker 3: an income that's only slightly better than you might do
22:23
Speaker 3: from fixed income products as well. But you know, setting
22:27
Speaker 3: that aside, the change is inheritance in inheritance tax will
22:32
Speaker 3: definitely cause more people to err towards inuities now, because
22:36
Speaker 3: you know, if you're going to lose forty percent of
22:38
Speaker 3: your pot, you might as well sort of get yourself
22:40
Speaker 3: a guaranteed income and get away from a lot of
22:44
Speaker 3: the problems. We've just been talking about about complexity in
22:48
Speaker 3: older age, and you can get around that to an extent.
22:51
Speaker 3: You know, we talked about hybrid anuities where you arenuitized
22:54
Speaker 3: enough of your pot to guarantee your fixed expenditure and
22:57
Speaker 3: stuff like that. There are also medical conditions as well.
23:00
Speaker 3: You know, this is shopping around not just to get
23:02
Speaker 3: a better standard rate, but a lot of people will
23:05
Speaker 3: be able to get if they've got slightly high blood pressure,
23:07
Speaker 3: you know, they're taking medication for that that. You know,
23:10
Speaker 3: it doesn't have to be sort of a death store
23:12
Speaker 3: or anything like that. They'll be able to get a
23:14
Speaker 3: better annuity rate for that as well. So it's well
23:16
Speaker 3: worth shopping around there. And then going forward, you know,
23:20
Speaker 3: the whole change in the environment whereby pensions aren't wealth
23:24
Speaker 3: planning instruments will change the sort of the way in
23:29
Speaker 3: which people look at drawing incomes down from pensions, and
23:32
Speaker 3: that's a huge new area where where work has been
23:35
Speaker 3: done but little progress may whereas now this is heavily
23:39
Speaker 3: incentivized progress because for example, you know, if you lose
23:42
Speaker 3: a big part of your pot on death, there is
23:45
Speaker 3: an argument for collectivizing death risk a little bit like
23:50
Speaker 3: life insurance in reverse. So that if for sort of
23:54
Speaker 3: an actuary or something like that, or you know, a
23:57
Speaker 3: pensions administrator looked at the whole fund for say particular yes,
24:00
Speaker 3: say for Bloomberg for example, and decide right in retirement.
24:04
Speaker 3: We can pay this rate largely because some people will
24:08
Speaker 3: die early, some people will dilate, and you collectivize that
24:12
Speaker 3: risk especially Yes, yeah, no, I mean you know, I mean,
24:19
Speaker 3: obviously there are details to to sort out there, and
24:23
Speaker 3: you'd want to improve confidence in pensions and administration, which
24:27
Speaker 3: is pretty low at the moment. But I would imagine
24:31
Speaker 3: that that is a way things are going to go,
24:33
Speaker 3: because it's you know, people want will want better incomes
24:37
Speaker 3: that than are available from annuities. Yet they are attracted
24:41
Speaker 3: to the certainty and sort of you know, maybe there's
24:44
Speaker 3: a trade off between certainty and sort of higher incomes there.
24:48
Speaker 1: All right, I think we better, we better come to
24:50
Speaker 1: a closer everyone might as you get bored of pensions,
24:52
Speaker 1: which occasionally does happen. I had one, not for us,
24:57
Speaker 1: not for us, But I gathered there are other people
24:59
Speaker 1: who lose interest minutes. Final question. There are we gather,
25:03
Speaker 1: or I gather from reading the newspapers at the weekend,
25:05
Speaker 1: quite a lot of people who took their twenty five
25:08
Speaker 1: percent or not twenty five percent. But when you know
25:11
Speaker 1: what you can get a short hand for out of
25:13
Speaker 1: their pension in advance of the budget. Yes, and now
25:16
Speaker 1: regret it and would like to put it back, and
25:20
Speaker 1: several of the newspaper Q and A Money things I
25:23
Speaker 1: read over the weekend suggested that that is possible because
25:26
Speaker 1: of the thirty day cooling off period. If you only
25:29
Speaker 1: took it out just before the budget, you can go, actually,
25:31
Speaker 1: I've changed my mind and you can put it back.
25:34
Speaker 1: Is that correct?
25:35
Speaker 3: That's absolutely correct. Basically, whether you should regret in inverted
25:39
Speaker 3: commas taking your tax free cash largely depends on what
25:43
Speaker 3: you do with it. So if it's just sitting in
25:44
Speaker 3: your bank account, you've lost the tax wrapper for it,
25:47
Speaker 3: the you know, the ability for those funds to grow
25:50
Speaker 3: capital gains, so you'd probably be better off putting it
25:53
Speaker 3: back using the cooling off period. But again, you know,
25:56
Speaker 3: if you're sort of trying to do this as part
25:58
Speaker 3: of your estate planning, drawing the tax free cash and
26:01
Speaker 3: gifting it and taking your seven year rule chances, it's
26:05
Speaker 3: probably still the main strategy. So it depends what your
26:07
Speaker 3: motivation for taking the money out in the first place was,
26:10
Speaker 3: what the best strategy is for now. You know, if
26:13
Speaker 3: you were just taking it out and parking it in
26:15
Speaker 3: a bank account, you might as well put it.
26:17
Speaker 1: Back and of course, the other thing say is that
26:19
Speaker 1: you know, just because you didn't change the rules in
26:20
Speaker 1: that budget doesn't mean she isn't going to change the rules.
26:23
Speaker 3: Yeah, no, no, I think sort of going forward, it
26:26
Speaker 3: is perhaps a little less likely because she's kind of
26:30
Speaker 3: acknowledged the tax free cash thing as a thing. But
26:34
Speaker 3: you're absolutely right, you know. I mean, basically, if you
26:37
Speaker 3: take forty billion out of the economy, growth isn't going
26:40
Speaker 3: to exceed expectations. Wandering out of my lane here, that's
26:45
Speaker 3: all right.
26:46
Speaker 1: Just in case there is anybody out there who did
26:48
Speaker 1: take the money out and is thinking about putting it back,
26:51
Speaker 1: do be very very careful because you don't want to
26:53
Speaker 1: full foul of any of the rules. We're not allowed
26:55
Speaker 1: to put much in after you've taken some out, because
26:58
Speaker 1: you could end up with a really nasty tax charge
27:00
Speaker 1: if you get that wrong. So if you're going to
27:02
Speaker 1: do it, take advice, make sure you get it right,
27:04
Speaker 1: and I think stats it. Unless anyone has anything else
27:08
Speaker 1: super interesting today about pensions, Nope, we good guests.
27:16
Speaker 2: Right.
27:17
Speaker 1: Thanks for listening to this week's Maren Talk to Your Money.
27:19
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27:21
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27:26
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27:30
Speaker 3: This point, Yes, it's a pension Man UK.
27:33
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27:36
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