Pensions from April 2027 – What is Their Purpose?

In a world of rising income taxes due to fiscal drag, pensions also became an extremely attractive way to accumulate wealth – tax relief on the way in and complete inheritability, even with the tinkering around the overall pension limit and the lump sum you could draw.

As a result, we now find ourselves with many people having some form of “unsecured income”, or drawdown as many call it, in retirement, alongside a continued focus on inheritability.

I then find myself reminding my fellow advisers of the time before all of this, when I was a young, starry-eyed adviser and some of them were still in nappies. Back then, retirement income was generally supported by some form of guaranteed income, such as an annuity or a final salary scheme, and only those with relatively unusual circumstances would consider drawdown as a viable option. And, shock horror, pensions were seen as a means of income generation rather than inheritability! After they’ve finished bowing down to my wisdom and good memory (!!), they are quick to recognise that what may have been the right approach to pension planning for the whole of their careers now needs a complete rethink…

But does that make pensions a bad idea now? Not in any way. This is more a reversion to their primary purpose – deferring part of your income until you need it in retirement, with substantial tax incentives, particularly for higher-rate taxpayers. Throw in an employer contribution on top and they remain hard to beat as an accumulation vehicle. They will not be the only answer for many of our clients, where a diversified approach to savings vehicles should be taken. This point about diversification of tax wrappers is often overlooked. In a politicised tax system where the rules are changed regularly, why would you rely on one thing as your primary means of accumulating wealth, whatever that might be? Will your business be worth what you hope it will? Will your property portfolio enjoy the growth of the past? Will markets continue to deliver the excellent long-term returns seen over the last 20 years? No one knows the answer to that, so we advocate a diversified approach.

What do I do if I have already accumulated significant pension savings?

Unless you wish to gamble on a future government changing the rules, which I sadly believe will be judged not to generate enough additional voting support, the answer is: use it! Take income, consider partial annuity purchase, and make provision for the next generation in other ways.

The annuity point is worthy of serious consideration. Use this to underpin your living costs so you can have more confidence to gift other assets down the generations, or to support premiums on Whole of Life insurance designed to pay out when the last one of you dies, as my colleague Imran discussed in a recent article.

Wealth taxes?

The prospect of wealth taxes, or some form of increased tax on pre-existing wealth, is being discussed again. For many of the wealth creators in the UK, this may prove a “final straw” if introduced, but this brings us back once more to the diversification point in relation to who owns assets. It should hasten the move towards wealth being more widely distributed amongst family members and different ownership structures: trusts, Family Investment Companies and the like.

All of which signals that although the world may feel quite uncertain, long-term plans should continue to be made and, if anything, with renewed vigour. Pensions form part of the balancing act between what you retain to maximise your lifestyle while you can, and what you do to support and pass wealth to the next generation as effectively as possible.

I am sat writing this in the Hebrides, so I may be feeling more reflective than normal. It feels like the computer equivalent of a “factory reset”, with my next generation being largely dormant. I’ll be ready, as will the whole team, to continue those planning discussions when I’m back in September.

Colmore Partners is an Appointed Representative of Best Practice IFA Group Limited which is authorised and regulated by the Financial Conduct Authority, the registration number is 223112.

This article does not constitute tax, legal or financial advice and should not be relied upon as such. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional advice.

Annuities are long-term, complex financial instruments that may not be suitable for all investors. The information in this material is for informational purposes only and is not financial advice. All investments carry risk, and annuities are no exception. The performance of an annuity is not guaranteed and can be affected by market conditions and other factors. It is essential to carefully consider your financial situation, investment objectives, and the product’s fees and restrictions before purchasing an annuity.