All my dreams have come true. For once I don’t need to begin a blog by explaining the details of the most radical changes to pensions in years, which were announced in yesterday’s budget.
This story isn’t hidden in the depths of the Money pages. Everyone’s talking about it!
Or at least they should be.
At RS, we’ve been talking about annuities ever since we first reported on them for DWP in 2008. Compulsory, irreversible, unpredictable and uncompetitive… read my blog from last month for a reminder of what’s wrong with the market.
Yesterday the Treasury not only scrapped the requirement to buy an annuity, but also said we can now access our entire pension pots from our retirement date in whatever way we like, subject to normal income tax rules.
This is so simple and obvious, I don’t know how we didn’t see it coming.
First of all, it’ll add competitiveness to the annuities market that doesn’t yet exist. Suddenly providers aren’t just competing with each other (or in many cases, with nobody), but they have to compete with the “I’ll just take the cash” option.
There was a lot of talk yesterday about how £4bn was immediately wiped off the share price of annuity providers, with suggestions that the Chancellor had ‘killed annuities’.
He hasn’t. Lots of us will still need the certainty that a guaranteed income for life will provide, and we should eventually see better annuity rates and more innovation.
If the stock market is right (cue laughter) then that £4bn represents profit that will now stay with individuals instead of the annuity providers – although admittedly lots will also go to the exchequer.
This is also great news for flexibility and individual decision-making. You could put the money into an ISA. Or keep most of it invested, and draw it down over time. Or leave it to your family.
You could also go on a massive holiday! Buy a boat! Blow it all in the casino and live on state benefits for the rest of your life!
And this, of course, is where most of the serious debate will now focus.
If you choose to take the cash, let’s be honest, you are taking a gamble on when you will die, and whether the pot you take will be enough to last you that long.
So can people be trusted not to blow it all? A former labour party adviser thinks not.
With freedom comes responsibility, and the need for informed decision-making.
“But hang on a minute,” you are undoubtedly saying now. “Surely this runs counter to behavioural economics, which is exactly what all recent pensions policy, including automatic enrolment, is founded on? We know people are short-termist, so why give them the tools to behave irresponsibly and potentially increase the long-term burden on the state?”
I’m glad you asked that.
Behavioural economics says we are short-termist and need Nudges to behave rationally… but not that most of us are plain stupid.
At the point of retirement, the immediate prospect of “this is the money you now have for the REST OF YOUR LIFE” is surely the Nudge most people need to behave reasonably rationally – particularly alongside a bit of compulsory guidance/advice, which the government is also introducing. Evidence from Australia seems to back this up.
But more importantly, it could increase retirement saving. We don’t fail to save just because we want the money now. It’s also because the rewards of saving into a pension are long-term and intangible.
Suppose I have a £50,000 pension pot.
Yesterday morning I had no idea what income that pot would get me in retirement.
Now I have clarity: I would have £50,000 for the rest of my life. I can now visualise whether that’s enough for me if I keep saving at the same rate – or whether I need to save more. (Answer: I definitely need to save more)
This new focus on ‘your pot of money’ instead of an intangible ‘pension’ should eventually increase saving for retirement, and maybe even reduce the burden on the state in the long term.
Incidentally we should really stop using the term ‘pension’ at all now – if you have the option to take cash at the end, then what you are investing in is by definition not a pension. We should simply call it saving (or better still, investing) for retirement.
So it’s official: the Chancellor has killed pensions.
Maybe it’s time for me to think about that career change after all…