After April next year we could see a wave of pensioners zooming to bingo or the golf club in Lamborghinis, or packing up and moving to new homes in the south of France.
This is because while Budget statements in recent years have tended to give pensions and savings a cursory nod in among the growth forecasts and tax on booze and fags, this year the Chancellor of the Exchequer knocked it out the park for pensions and has left the industry flabbergasted.
In Wednesday’s Budget George Osborne effectively ended compulsory annuitisation, a mainstay of the at-retirement landscape for a number of decades, by changing the tax rules on pensions from April 2015. From that point on, people will be able to withdraw all of their defined contribution (DC) pension savings as they wish at retirement without incurring the 55% tax, which is likely to become 20% for most retirees.
Shares in annuity firms immediately plummeted on the news, while the mainstream media jumped at the chance to say the move will see pensioners blow their pots on holidays, golf tours, flying lessons and all manner of weird and wonderful pastimes. This, if it happened, would lead to them falling back on the state to fund their retirement and undo all the hard work that has been done to salvage the reputation of pensions in the public eye.
It probably didn’t help when earlier this week pensions minister Steve Webb was quoted as saying: “If people do buy a Lamborghini but know that they’ll end up just living on the state pension, that becomes their choice.”
This is clearly a pensions minister and government confident about state pension reform when it is perhaps too early to be. But they have a point that it is indeed a retirees’ choice to decide where their hard-earned money is invested and/or used. I like to think the fact that someone has saved into a pension in the first place should suggest they are financially savvy enough to steer their pot at retirement, but it is a big gamble from the government. As a safety net, the government’s pensions bombshell also included a policy that everyone who retires with a DC pension will be offered “free and impartial face-to-face guidance” on their choices at retirement.
This is to be welcomed, but again might be wishful thinking to believe everyone will heed this advice and, perhaps more importantly, that is is even possible to dish out to each and every retiree on such a big scale. The government said it will be made financially possible through a levy on providers and trust-based schemes, but how do they feel about this? And will the advice be regulated to ensure consistency across the board?
These and many more questions and hurdles will arise. Indeed, elsewhere DC default funds will have to be altered because their glide paths will no longer need to target annuities, while the potential abolishing of defined benefit (DB) to DC transfers – also announced on Wednesday – could alter DB investment strategies as their run-off profile changes and reduces the attraction of holding index-linked gilts and UK corporate bonds.
I can understand Osborne’s logic when he said the tax rules around DC pensions are a manifestation of a “patronising view” that pensioners can’t be trusted with their own pension pots, but I just hope this is a success. Otherwise we might see many pensioners driving Lamborghinis but with little else to show for their decades of hard work and saving other that the basic state pension – and we all know that won’t be much.
See Catherine Doyle’s piece for more on annuities and DC investment strategies following the Budget announcement.
Comments