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Budget 2014 – What it Means for the ‘Retirement Smile’

Chancellor George Osborne surprised a lot of people by announcing, ‘no one will have to buy an annuity’ at the 2014 Budget. So what does this really mean?

The Retirement Smile

This is an idea based on the graphical representation of income needs over time (age in this case).

It’s the idea that in the early years of retirement individuals expenditure can be at their highest as they reap the rewards of entering retirement, increasing their holidays, taking up hobbies and generally enjoying their spare time after decades of working.

Expenditure then beings to reduce as retirees become less active, and health alignments may become more of a concern. In the later years of life, expenditure can increase again, and for many can be at its highest level where long term care is required and fees are incurred.

The graph below demonstrates approximate income needs at certain ages.

The retirement smile

So What Does This Mean?

Flexibility within the retirement income market has been needed for some time, particularly with annuity markets finding it difficult to offer good rates as people live longer. With underlying gilt rates remaining low this leads to many people wanting to depart from the traditional method of buying an annuity to get a retirement income.

The Chancellors announcement gave no consideration to the fact that the continuing increases in life expectancy means individuals now have to plan their retirement income needs over a period of decades, where many factors such as health and on-going care needs are unknown.

Nicola Hartley, Independent Financial Adviser at SM Financial Services comments:

“This is good news for retirees, as it opens them up to greater financial freedom. However, people should be cautious of abandoning the idea of an annuity wholesale.

The recent budget will hopefully clean up business practices in the annuities market, ensuring that retirees receive the best income available to them. Those with medical conditions should still consider the uplifted income they may receive from an enhanced annuity. Retirees should give consideration as to whether simply drawing down from their pensions as and when required will be an adequate method of ensuring that the funds provide a regular and stable income for as long as required.

Retirement can now span several decades, and if appropriate planning and advice is not received the new flexibility may lead to many retirees running out of funds in later years when expenditure levels may be at their highest due to long term care needs”

Bonds? We Weren’t Expecting You

In another unexpected turn, Mr Osborne introduced two new National Savings and Investment (NS&I) bonds, aptly named Pensioner Bonds.

There are two types, the first is a 1 year bond with a rate of around 2.8%, and the second is a 3 year bond with a rate of around 4%. These rates expect to beat the current highest rate for NS&I bonds, which are children’s bonds with a rate of 2.5%.

These are highly competitive options for a retiree looking to invest their retirement pot safely. The downside? You can only put £10,000 into each bond, which for many; will still leave a large portion of their pot to invest.

With more choices now available to them, retirees need to assess their options and make sure they get the best deal with whatever product they may choose to buy.

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