New Pensions Rules – Budget 2014, or “Look what they’ve gone and done now….”

In case you missed the content of the Budget here’s a handy link to a concise, printable document which sets out the facts and figures: March 2014 Budget Summary

I’m still shaking my head over the proposals to allow all people in money purchase pensions (non-final salary) to have unlimited (“flexible”) drawdown on their pension pots at retirement age, regardless of size of fund and without any necessity for a level of guaranteed income from another source. The sentiments below will no doubt be at odds with many with an interest in the subject. Certainly the media and various industry pundits appear mostly in favour of this new found relaxation of the rules.  Many people approaching retirement are now looking forward to planning what they will do with their fund, and financial advisers are looking forward to more cash investments to advise upon. There is no doubt that this will bring opportunity to many, but I’m wary. This all sounds like a bit iffy to me.

The main justification offered by the Chancellor for the proposed relaxation of pension rules announced last week is that “people who have been responsible enough to save all their lives for their retirement will be responsible with their money in retirement, and should have the freedom of choice”.  Sorry, I simply do not buy that. I think there are some likely adverse socio-economic effects, which could be on a wider scale than predicted. I have a number of concerns:

A huge number of working people in the UK (millions, literally) aren’t currently saving in a pension, but soon will be (shoe-horned into one via Auto-Enrolment (“AE”) regulations.)Many of this category of pension saver would not have saved in a pension otherwise, will have a smaller pension pot than average at retirement age, and, being reluctant savers, are more likely than most (in my opinion) to spend the cash quickly when given access to it. AE is a fine idea which compels those not saving for their own retirement to at least take some modest steps towards doing so, and so helps improves income in retirement. In my opinion, to then offer such pension savers the whole fund back as a potential lump sum undoes a lot of the good that AE brings.

For other pension savers, the temptation to strip out large chunks will be great for a variety of reasons. Who, in their sixties, hasn’t got a son, daughter or grandchild who is struggling financially? Maybe they cannot get on the housing ladder , or need some other important financial assistance. How many wouldn’t consider making a loan or gift from this pot of gold which is now accessible from the Bank of Mum and Dad?  The tendency in this country is for parents to assist their offspring far beyond age 21, some with an amazing capacity for selfless acts. That money isn’t going to end up looking after the parents in old their age after all.

‘Ah’, you say, ‘but they can invest that money in something other than an annuity now’. Well, yes but you could pretty much do that under SIPP drawdown anyway, apart from investing in residential property. SIPP drawdown was not an exclusive club at all, but it did require financial advice under strenuous compliance to ensure it was suitable to the client. How much depth of advice can be given under this “free financial advice for all retirees” being bandied about I wonder?

Consider also the more sinister effects of the proposed changes. For example, there will be instances where avaricious no-good kids will be looking at mum or dad’s pension and counting the days to retirement, when they can bully a serious chunk of cash from them. Not very likely? I’ve seen it with equity release in the past with children making unsubtle enquiries “on behalf of their parents”, and this will be a much easier way for them to try and raise some quick cash.

Some will call these regulatory changes a great opportunity, a freedom to carve up one’s pension any way you choose, and something that people want. But the whole idea of a pension is to provide an income for life, that is what separates it from other types of saving. It’s not a rainy day savings plan, it’s a rest of your life savings plan. Common sense suggests that many people who will retire under the new proposed regime will not be capable of managing their financial affairs suitably, and would have been financially better off with a compulsory annuity, or even capped income drawdown if they fit the suitability criteria.

More generally, let’s face it, we don’t know how long we will live, people have never had this much access to pensions before, and simply being in a pension plan half your life doesn’t make you super-sensible with money. The fact that so many people accept poor annuity offers from their pension providers at the point of retiring, rather than look to the open market, is a good example of how financially savvy people aren’t when left to their own devices.

“… But we’re going to get everyone financial advice for free at retirement”. How does that work then? I don’t know financial advisers who work for free. Someone will pick up the cost so who will it be? The retiree ultimately. I suspect. And how good will that advice be?

No-one was lobbying government for this per se. There has been a recent upswell of criticism of the annuity industry (most of it well-founded) but that could be sorted out, even if a little more regulation or legislation was needed.  So why now?

Contrary to the political spin, I believe the proposed relaxation of rules on pensions is likely to see many retirees releasing money from their pensions relatively quickly, who would be better advised not to do so. If that happens then it will raise tax revenues for a few years in the shorter term, maybe even plug an income gap for government that is no doubt sorely needed. But it would be a short-term injection. Will everyone blow their pension funds and then throw themselves on the mercy of the State for a basic income for the rest of their lives? No, but some will, at least, and perhaps quite a few.  The Chancellor claims that the proposed new flat-rate State pension with no means testing would be an adequate safety net. At around £7,000 per year I have my doubts. Moreover, I also have severe doubts as to whether the State can maintain that level of flat-rate State pension in real terms over the long term. Of course the current mob in power will have moved on or retired by then (on their generous State-funded final salary pensions).

This is scary stuff folks. I know everyone thinks it’s great, a brave message from pensions minister Steve Webb, but I don’t think the British working public are ready for it yet. By all means extend flexible drawdown, and by all means reform the annuity industry. But let’s not completely throw caution to the wind eh? Because the country cannot afford to keep getting things like this wrong. All eyes will as usual be on the next generation to fund State pensions and other benefits, and let’s face it, with an ageing population and an unfunded State pension, they’re already going to have to pay for enough as it is.

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