This is not surprising. After all, the main purpose of a pension is to provide income in retirement, however advisers are aware that this it is not always the most efficient route.
Clients often appear to have a more emotional attachment to their Isas, cash and rental portfolios than their pension – the result perhaps of having very little to do with it while it was unavailable for access.
Persuading a client to spend their Isas, cash and other assets may come down to the adviser’s ability to carry out often complicated tax calculations and to explain the results in a way that the client can relate to.
Starting with any remaining pension commencement lump sum makes sense, although of course it will reduce the value of the future investment, but anything beyond this tax-free cash amount will be subject to income tax.
Clients should also be made aware that drawing taxable income will also impact on their ability to save more into their pension, and that the faster money is withdrawn the greater the cumulative tax bill is likely to be with the impact being greatest for those who take income when accessing their pension for the first time.
HM Revenue & Customs has still not seen fit to alter the position with regard to emergency tax on these payments and clients very often get a shock when they see how much has been deducted.
The excess can of course be reclaimed, but this will not help if the client has a pressing bill to pay immediately.
After tax-free cash the next most obvious encashment should be any Isas as these may be paid free of tax.
Often seen as a ‘rainy day’ fund during the pension accumulation years, once a client has reached age 55 Isas should be more of a current account while any pensions not required to produce income take over as the back-up plan.
We would also recommend using the client’s capital allowances, either to fund increased spending or to replace withdrawals taken from pension or Isas.
Is there any upside to the current situation?
For many people, finances will be more difficult this year.
Advised clients, who for obvious reasons tend to have greater assets than the average population, are likely to be less affected and there is one area where the rising cost of living could actually be helpful.
Since the introduction of pension freedoms in 2015 annuity sales have plummeted, partly because rates have been at their lowest level for some time.
