One of the biggest changes to pension savings in UK history could be a bonanza for wealth managers and change how the sector thinks about engaging with retirement fund holders.

“Revolution” is a big word but it seems right to describe a UK pension game-changer. New investment freedoms coming in April will affect not just nearly five million people but also a wealth management sector that may once have turned up its nose at retirement savings. Pensions just got interesting.

In recent weeks, companies such as Hargreaves Lansdown, Standard Life and Old Mutual Wealth, among others, have launched services targeting people exploiting new investment freedoms announced last year by UK finance minister George Osborne. Pensions will, in a way, become just another type of savings and investment product. According to some people this publication has spoken to, the annual amounts of money that could be pulled out of existing defined contribution – and some defined benefit - pension schemes could be counted in the tens of billions of pounds.

“The wealth management community as a whole is extremely interested in this area and is looking at it,” John Barrass, deputy chief executive of the Wealth Management Association, the body representing a large chunk of the UK’s industry, told WealthBriefing in an interview.

From the start of April, people holding defined contribution retirement savings schemes will, from the age of 55, be able to take this money out and won’t be forced to buy annuities to provide for their old age. (Annuities are, due to high UK government bond prices, expensive and widely considered to be poor value.) People can, if they receive professional advice, also move funds from defined benefit pensions and turn them into defined contribution schemes. The government has also changed inheritance rules so that people can pass on pension savings without the current tax rate of up to 55 per cent. This could be a bonanza for wealth managers and other sorts of private client advisors. Less benignly, arguably, such a change could tempt people into unwise savings or, worse, improvident spending.

“It makes sense to think of retirement planning as something that extends to the full range of the individual’s liquid asset pool rather than something that sits in a box called a `pension’,” Alex Montgomery, chief executive at Edinburgh-based Turcan Connell Asset Management, told this publication. “Restrictions that were there have been largely washed away,” he said.

Montgomery expects that the reforms mean that wealth managers, to win business, must offer retirement, estate planning and tax planning in a single offering, or at least set up arrangements to outsource this. “I think some firms will make strategic alliances,” he said. Montgomery’s own firm, he said, has a good fit for such a blend of expertise: “Our wealth management business is a wholly-owned subsidiary of a private client law firm.”

He is also upbeat about the effects of Osborne’s removal of old inheritance tax hits on pension bequests. “IHT changes to the treatment of pension pots when a spouse and that spouse’s partner dies are important. Previously, the tax burden on the amount left could be as high as 55 per cent, higher than inheritance tax. This mean that a lot of people were, as soon as they could, looking to move money from pensions into other vehicles carrying less potential tax. As a result of the Osborne changes, the pendulum will swing the other way and encourage use of long-term savings as part of the estate planning process,” he said.

Pensions may be dull (although not boring in those many cases where funds were hit by soaring liabilities, as in the past decade) but they are undeniably big pools of assets. Members of the UK’s National Association of Pension Funds, for example, collectively oversee more than £900 billion ($1.371 trillion) in occupational schemes. Even if only a single-digit fraction of that money is let loose, these are large amounts. The NAPF said about 4.8 million people will be affected in the next five years. (In the UK, defined benefit, also known as final-salary, pensions have been in decline, as unfavourable demographics, poor bond yields and new accounting rules have prompted company finance directors to shut them to new members and amend their rules.)

At a time when real interest rates have been low or even negative, and the cost of hedging liabilities through investment-grade, mostly government, bonds such as gilts has soared, forcing pensioners at a set age to buy annuities has become so unattractive that the current coalition government decided to scrap that rule. Despite complaints about the annuities rule for many years, the decision by Osborne last year to free up pension investments was still a shock, and mostly given positive reviews in the media and City.

To some extent, the freedoms to be granted in April have an echo in the approach taken by governments such as in New Zealand, the WMA’s Barrass told this publication. Some countries, with compulsory pension savings, such as Australia, nevertheless give citizens a degree of freedom in how their savings pots are invested. US Individual Retirement Accounts, or IRAs, have some points in common with UK Self Invested Personal Pensions (SIPPs), a form of retirement savings pot that already has some – with certain limits – investment freedoms.  

Older readers might remember that moves to deregulate parts of the pension world, as happened in the 1980s under the administration of Margaret Thatcher, did not always go smoothly, with some mis-selling cases arising (although arguably this is inevitable with fallible human beings). Some employees who contracted out of company retirement schemes regretted it.

However, while such talk of people being misled has a basis in fact, Turcan Connell’s Montgomery had little use for what might be called financial paternalism. Asked about concerns over whether people might be imprudent with their pension money and spend it on sports cars or unsuitable assets, he argued that while some foolish spending might happen, it would be mostly unlikely. And the UK wealth management industry, chastened by the regulatory overhaul brought on by the Retail Distribution Review, is in some ways better placed to serve people affected by the change, he said.

There appear to be some concerns, however. Standard Life, for example, has made a point of how there is something of a gap in the type of available advice for people likely to embrace the new investment freedoms. Its own venture (see the story here), looks like canny marketing too. Old Mutual and others have sought to show they are trying to keep on top of this development. And the change to IHT rules about pensions should stir work for private client law firms and accountants across the UK.

This publication has started to see a slow, but steady increase in the volume of commentary and product offerings related to the change. Threadneedle, the investment house, recently briefed journalists, including your correspondent, about some of its offerings with pension-related savings options in mind. 

Some wealth managers focusing more on mass-affluent or lower-end HNW individuals may focus more on the reivestment of liberated pensions money, although those houses with more of an ultra high net worth approach are unlikely to chase such flows, given the margins involved. Private banks might, however, be interested where sizeable pension inheritance money is in play.

The law firm, LEBC Group, says that regardless of whether the pension rule change remains intact after the UK May general election, lawyers dealing with inheritance issues must be on top of these developments.

That final point is important because with a UK general election due in May and polls not giving any clear outcome, it is by no means clear that the revolution is assured. Politicians have put through considerable changes to the pensions world in the past few years, although not so far on the scale of the latest ones. Any wealth manager, lawyer or tax advisor must assume there could be more changes ahead.