What do the dramatic new pension freedom rules in April mean for you

Every Investor

Every investor2 Mar 2015

What are the changes

One of the biggest gripes for UK pension savers is the poor value we receive when we exchange our hard earned pension pot for an annuity. This process has been in place by the nanny state to ensure that pensioners receive private income in retirement rather than being able to spend their entire pension fund. The problem is that the rates of income we receive for our pension fund are linked to a number of factors including interest rates so the income retirees receive has sharply fallen over the past decade. The average UK pot size at retirement is £72,134 (rising to £97,156 in London). For the average person this has been built over a lifetime of working and saving, but a typical annuity would only provide a monthly income of around £240/month on this pension.

The Government realised that changes had to be made to achieve their goal of encouraging more people to save privately for their retirement. The surprise is how radical the proposals were. This April will see these policies come to fruition.
The most sweeping upgrade is that anyone cashing in their pension pot from April 2015 will be able to exchange 100% of their pension pot for cash instead of being forced to buy a poor value annuity.

pot at
Typical monthly
Effect of 10%
market fall prior
to retirement
under current rules
Effect of 10%
market fall prior
to retirement
after April 2015
UK average£72,134£240£24/month loss£7,213 loss
London average£97,156£323£32/month loss£9,715 loss
Medium pension pot£250,000£833£83/month loss£25,000 loss
Large pension pot£1,000,000£3,333£333/month£100,000 loss

What do these changes mean for you

Clearly, these new freedoms provide a great opportunity to the British public. We will have more control over our pensions and more flexibility to derive the best value out of our retirement savings. However, it also means that some people may spend or waste this cash and be left with very little to provide for their retirement years. Only time will tell if this ‘social experiment’ will be abused by short-sighted retirees. The changes also mean that there is now far more at stake for your future. Under the previous annuity structure, falls in the equity markets, poor performing pension funds, or simply overcharging pension providers, may have meant the loss of mere pounds per week off our pension income. However, with your entire pension now available for withdrawal, such events could leave you out of pocket by tens of thousands of pounds.

Let’s look again at the average pension pot of £97,156 in London. October 2014 experienced equity market falls of 9% in a matter of days amid fears over ebola and the Eurozone crisis. Under the old rules this would have reduced monthly pension income by around £29/month. Not a big deal. But under new rules, your accessible pension fund would lose around £8,750 in value during the same month. Even the difference between low charging pension schemes and those with the highest management charges, can erode your pension fund by around £10,000 on average over its lifetime.

What are the threats?

ThreatEffect on pension fundsLikelihood
Terror threat from Islamic StateRecent attacks sent markets down 3-5%. A chemical or cyberattack on the underground could cause markets to tumble around 10%50%
Greece’s new ruling Syriza party tearing up austerity program.The UK alone has £13billion of debt exposure to Greece. Writing off debts would impact UK banks and businesses. 5-10% market falls70%
Greece leaving the EuroThe Swiss have already de-coupled the Franc from the Euro. If Greece leave the Euro, it could encourage Spain and Portugal to do the same, spelling the end of the common currency as we know it. 15-25% drop15%
Crude oil price to remain lowRussian and Middle Eastern money has provided more stimulus to the UK market over the past 3 years than any other. They are the hardest hit of the oil producing regions, so the UK is already starting to see foreign investment dry up. 3% falls over the next 18 months80%
General Election to end in hung parliamentThe Tories only have a slender lead which could mean a weak coalition Government. Many business leaders economic envisage catastrophe if Labour team up with the SNP. 5% drop50%

How can gold help protect your pension?

Such market turmoil requires portfolio diversification if you’re to be properly protected. Gold can provide this insurance as its non-correlated to the most common asset classes. In other words if we see stock markets and bonds fall, it is most likely the price of gold will increase. This means that holding some gold in your portfolio will iron out any fragility in the economy or even a terror strike should it happen. No-one can correctly predict how markets will perform from now until your retirement, but by ignoring gold, you leave your entire pension pot and retirement plans at risk. Owning some of your pension in gold will reduce your pension’s overall volatility and help you sleep at night in the comfort that your pension is protected.


Physical Gold bars in a SIPP

There are several ways to gain exposure to gold within your pension from buying mining shares, Electronic Traded Funds (ETFs) and gold funds. However, if the motivation is to achieve true portfolio insurance, then by far the safest way to own gold is with physical gold bars.

With Physical Gold, you’re able to invest into gold bullion via a Self-Invested Personal Pension (SIPP).

A SIPP has several advantages over regular private pensions. As its name suggests, the investor self-invests and takes control of their pension, reducing many of the high management fees associated with some private pension schemes. Physical Gold has negotiated exclusive low fees for its clients with some SIPP providers, reducing costs further. You’re able to house not only gold bullion in your SIPP, but also share funds, bonds, cash and even commercial property.

When you invest through Physical Gold, you will receive retail size gold bullion bars (to provide flexibility) which are stored and insured on your behalf at a specialist warehouse in the UK. All your gold is fully allocated (not leveraged like ETFs) and fully segregated – meaning it’s fully ring-fenced from other investors’ gold, as well as from Physical Gold’s balance sheet.

There is nothing worse than a significant market fall 5 years or less before you were looking forward to releasing the cash in your pension. A 25% fall would leave you with the dilemma of postponing your retirement in the hope that time would recover values, or simply retiring with a compromised lifestyle. Make sure that the exciting changes coming this year change your life for the better, rather than highlight the retirement you could have had.

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