NEW rules allowing people more flexibility in how they take their private pension pots are a “ticking timebomb” for some.
That was the warning from top pension adviser Richard Costain to over 50 members of Wrexham Business Professionals (WBP) when he addressed their latest technical event at the town’s Ramada Plaza Hotel.
WBP is a group of highly skilled professional firms of solicitors and accountants working together to raise the profile of expertise that exists in the region and beyond.
They have regular updates on various technical issues concerning their firms from visiting experts.
Mr Costain, of Newlyn Financial Management Ltd, has been working in the financial industry for over 30 years and regularly advises professionals on the intricacies of the pension system.
Along with Medwyn Edwards, of Hadlow Edwards Wealth Management Ltd, he had been invited by WBP to give an explanation on changes to the pension system introduced by Chancellor George Osborne last April which are the most radical in almost a century.
The two experts explained that now, for the first time, people have a choice of how to take their pension nest-eggs – either in the form of a traditional annuity which pays them an income for the rest of their life, a lump sum payment or a drawdown where amounts can be withdrawn as they are needed, just like a bank account.
But Mr Costain, who gained experience with Barclays Bank and Prudential Assurance before becoming an Independent Financial Adviser (IFA) in 1990, warned over one aspect of the pension changes which he predicted could affect a number of people later in life.
He said: “This is my own personal view and I’m not giving it on behalf of my company but there is a ticking timebomb where people who are going into care later in their lives are concerned.
“Before these changes they would have had an annuity to help them pay for their care fees but if they have taken out the money in their pension pot the burden of paying those fees will fall on to local authorities and the taxpayers.
“This especially the case if they had only a small amount in their pension fund in the first place.
“That’s why I always recommend to clients, if they are thinking of taking money out of their funds, that they should try to develop a balanced retirement portfolio of assets to fall back on. And having a bit of everything doesn’t do any harm at all.”
These other assets, he explained, could perhaps include the sale of a business, investments such as ISAs, or buying property to let.
While praising the change in the rules, which he said had made pensions a lot more attractive to many people, Mr Costain also said they had been causing major problems for the insurance companies.
“I know from talking to people working in the sector that the demand on these companies to produce the paperwork for people either taking lump sums or drawdown has put them under a lot of strain,” he explained.
“The government set the rules and I believe they are very good rules but I don’t think it fully considered the impact on pension providers and their administration departments.”
Later, in a question and answer session with the audience, Mr Costain was asked if he thought the Government had done enough to explain the new pension situation it had created.
He replied: “No, people are going to other places to get information and the Citizens Advice Bureau I think is pretty snowed-under.”
Medwyn Edwards, who conducted the pension advice session alongside Mr Costain, has over 30 years’ experience working in the financial services sector and is a director and founder member of Hadlow Edwards Wealth Management.
His specialities are investment and pension planning, of which he has built up substantial knowledge and experience over time.
He said the pension changes introduced in the spring had been the largest since the Beveridge Report which gave birth to the welfare state in the 1940s and he welcomed the “greater flexibility” they had given to clients.
However, he said that the extra choices they had given people on how to take their pension funds had made it more important than ever they had the information with which to make the right decisions.
“Most people know their pension can now be taken as a lump sum without buying an annuity and that there is no limit on the amount they can take out of their fund,” he said.
“However, a blended approach of an annuity, a lump sum and drawdown may be more appropriate and can work well to mitigate the risks involved.”
Mr Edwards also sounded a note of caution about some of the methods of taking pension cash, explaining that opting for a lump sum payment, for instance, could force certain people into a higher tax band.
His stressed: “People need to consider very carefully what affect each of these ways of taking their pension fund will have on their financial affairs.”
Gwyn Edwards, of the accountancy firm Godfrey Edwards, thanked the two experts on behalf of Wrexham Business Professionals for passing on their “nuggets” of information to members.