End of financial year considerationsPosted on: 14 April 2015 by Steve Wanless
Steve Wanless reflects on why we leave sensible financial decision making until the last possible minute.
The end of the financial year is always a chaotic time. Decisions and action that should have been taken weeks, even months ago are suddenly upon us.
Whether it’s using your annual ISA allowance or switching before a regulation change, that deadline is upon us and then gone.
Independent Financial Advisers (IFAs) are only too well aware of the dangers of rushing when dealing with important financial choices – or taking a course of action simply to take advantage of a tax break.
They urge caution – and the long-term view. ‘Doing nothing’ can often be better than making the wrong choice in the financial world.
New pension freedom
This year seems worse. As well as the usual deadlines, the brave new world of pension freedom is becoming a reality.
The media are bombarding us with information about the choices now available in regards to our pension pot, provided we have reached the age of 55; they also warned us to be on our guard from those wishing to grab a share of it.
If that wasn’t enough, there’s the general election in early May. The phrase most commonly used by the political commentators is that it is “too close to call” – which basically means nobody, expert or not, really has a clue what is going to happen.
For many of the public, the prospect of another month of listening to politicians of whatever party is rather frightening.
There is promise after promise of increased spending, with little information about where the money is coming from. Both the Tories and Labour have committed to not raising National Insurance or VAT, so that money is going to have to come from somewhere else.
The days of two-party elections in the UK, a simple choice, are long gone. One recent televised general election debate featured seven political parties – and there were others who complained about being left out!
The one thing that political commentators are agreed on is that no single party, i.e. the Conservatives or Labour, will gain enough seats to be able to form a majority government. It is generally accepted that we are in the era of the Coalition.
Plan for the next 30 years - not your next TV
It makes taking any long-term financial decisions extremely difficulty at the moment. There are so many unknown factors; the tone of current advice is to take your time, especially with regard to that newly available pension pot.
Many financial institutions are reporting a flurry of activity regarding pensions, but it makes sense to heed the views of Steve Webb, the pension’s minister. His belief is that you should be planning and thinking about the next 30 years when making pension decisions, not rushing to grab your pension pot on the first day you can!
One of the great worries is that this new pension freedom will mean that some pensioners will run out of money, because of living longer than they anticipated.
Recent information from the Pensions Policy Institute reveals that this could be a real problem.
Savers believed that eight in ten men aged 65 would reach 70 – the current correct answer is 93%. The same group thought half of them would reach 80 – in fact 75% would. And just one in five thought they would make it to 90 – one in three will.
The only age group where responses matched the reality of the situation was the answer to how many would receive a telegram from HM The Queen (age 100) – one in 10!
Another key question is how much money will you need to live on? And how much will you need in reserve? We are all different, even financially. Some live on the edge, day to day, credit cards and renting. Others hate to borrow and always keep more than is necessary for that rainy day.
So, as well as making sure you consult an IFA over your pension plans, it is important to read up on all the changes and aspects of this new pension freedom. Money matters might seem boring to some, but do not under-estimate what is at stake when dealing with that pension pot!
Death knell for the annuity industry?
It is worth recalling the words of Chancellor George Osborne in March 2014 when his Budget speech shocked the annuity industry.
“I am announcing today that we will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. Pensioners will have complete freedom to drawdown as much or as little of their pension pots as they want, any time they want, no caps, no drawdown limits.
“Let me be clear, no one will have to buy an annuity.
“We are going to introduce a new guarantee, enforced by law that everyone who retires from these defined benefit schemes will be offered free, impartial, face-to-face, advice on how to get the most from the choices they will now have.”
It is a great shame that guarantee was watered down. ‘Advice’ became ‘guidance’ and there is a feeling that this change has opened the door for the unscrupulous side of the financial world.
That change makes it even more imperative that you seek expert, specialist advice (an IFA) when make financial decisions.
Elect the wrong party or MP, and you can eventually rectify that mistake and kick them out. Not with your pension. Get that decision wrong and you will live with the consequences for the rest of your life!
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