With the new pension freedom rules now in operation, Con Keating questions just how better off pensioners will be.
It seems just yesterday that George Osborne announced the complete abolition of the requirement to annuitise DC pension pots, and from the degree of preparedness of the pensions industry, an independent observer might be forgiven for thinking just that. We have seen the creation of PensionsWise, but that guidance with its five choices is badly incomplete for most pensioners – not least because of the tax ramifications.WAIT AND SEE We have seen a plethora of surveys, with considerable inconsistencies between them, in the search to establish how these pension consumers will behave. The uncertainty around the exercise of these freedoms is one rational reason for some of the reticence of providers to market new products in response to the freedoms. Doubtless, these providers have been considering the design of potential new products, but not committed to launch – the silence is deafening.There has been a lack of innovation also in drawdown products, where demand is clearly going to be higher. New offerings are few, and far between, and most are simply far too expensive to be considered seriously. Some of the ideas that were widely floated soon after the freedoms were announced, such as combined drawdown and later life annuities have simply not materialised. Where is the capital markets homologue to the insurance-based annuity, which regulation made so expensive and poor value for money?Some point to the poor take-up of the previous freedoms, but the qualifications of a minimum income of twenty thousand pounds and restriction to a maximum drawdown, as calculated from time to time by the Government Actuary, greatly limited the attractions of that.MAKING UP THE DIFFERENCE The importance of the post- retirement investment income to the total pension should not be underestimated; for most, it amounts to more than 50% of the total pension value. The consequence is that low-risk, low return investment strategies, as are being advocated by many investment advisers, are likely to end in tears and older age poverty.The repayment of debt with pension savings is clearly advisable, particularly in light of the recent changes in insolvency law. It is difficult to see how buy to let property can be an option for any other than the rather well-heeled, and self management to reduce letting agents’ fees is not likely to prove viable for the very old. Equity drawdown is seen by many as being a supplement or even replacement for their pension but that is predicated on house prices continuing their upward spiral – though at some point in the coming decades, the political will to build enough housing to satisfy affordable demand from the younger generation is likely to develop and crush that prospect.Some potential developments could help, such as the use of collective arrangements – collective decumulation, for example, but that must await the detail of the CDC legislation in train. The reduction in the lifetime allowance to £1m does serve to limit one potential form of abuse of the freedoms – that of tax-advantaged saving for bequests. However, given the negative message this sends as to pension saving, a minimum drawdown would have been preferable and more direct.POOR PREPARATION Judging from my email inbox traffic, the only people who appear well-prepared are the fraudster and scam-merchants. There are still huge uncertainties. How many DB members really will transfer to DC to take advantage of the freedoms is unknown. With the prospect of a secondary market in existing annuities being developed, it is difficult to see any clarification of the uncertainties of the post-retirement world in the near future.LOOK BACK IN ANGER The fundamental problem with these freedoms, of course, is that they are yet another extension of the financialisation of our lives, and the advocacy of financial literacy as a cure-all a symptom of this. The political attractions are obvious. Under this worldview, the structural problems are ignored, and anything and everything that goes wrong is the fault of the individual; it seems unlikely that history will judge these freedoms as anything more than political opportunism, with a very high cost in individual welfare.Con Keating is head of research at BrightonRock Group“The fundamental problem with these freedoms is that they are yet another extension of the financialisation of our lives. The political attractions are obvious.”
Con Keating
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