Every week I publish my very own “Kev’s Column” online, this week I take a look at the debate around the changes made to Pensions in the recent Budget.
It is rare that the words “Pension” and “Revolution” appear in the same sentence as most people are rightly cautious about their retirement provision, but this week’s Budget saw the most radical changes in how pensions operate for decades.
The Chancellor set out that by removing the effective requirement to buy an annuity, people will have greater flexibility in accessing their pensions. This means that people can choose how they access their defined contribution pension savings, for example they could take all their pension savings as a lump sum, draw them down over time, or buy an annuity.
Alongside this, the government is introducing a new requirement for pension providers to make sure that everyone retiring with a defined contribution pension pot receives free and impartial face-to-face guidance on the choices they face when deciding how to use their retirement savings.
This may sound very dry, but the radical side of this is that it frees savers from being forced to trade in a large pension pot built up over a life time for what could be a relatively small annual return. Rather than being forced down one path, they can choose their own route to a comfortable retirement.
For some years there have been concerns that the market in Annuities (Pensions) does not work well for savers, not least because at Retirement you have little choice as to what to do with your pot other than buy one with the majority of it. The 55% tax penalty for going beyond the permitted lump sum ensured retirees had to accept the ratio offered.
The current emphasis on taking an annual pension, rather than a larger lump sum, dates from the era when virtually all works pensions were so called “Final Salary” schemes. This meant it made eminent sense to trade in a pot of savings in exchange for a guarantee of receiving a percentage of your salary for the rest of your life. Whilst these pensions still exist in the public sector very few remain open to new employees in the private sector. Many also make their own provision via private pensions which may not produce the returns a traditional works scheme does in the form of an annual income.
For many an annual pension will remain the best option when they retire, with some only taking the minimum lump sum. Yet for others, perhaps those suffering from ill health, someone who has delayed retirement into their 70’s or a retiree who may have a mortgage still outstanding on their home, the chance to access a larger lump sum may be a better choice.
In recent days there have been claims from some opposing these changes that this could see people waste their pension shortly after retirement or leave them penniless.
It is hard to believe that someone who has conscientiously saved a pension pot for 30 or 40 years is not going to take clear professional advice before making a decision. In addition the need to pay tax on withdrawals from a Pension Pot as if they were annual income will deter sudden decisions to remove a lifetime’s provision for a spending spree in one year.
The key test in this area is whether we trust people to make decisions about their own lives, based on professional advice, or that the state should set down in detail the percentages regardless of personal circumstances. For many years the wealthiest have been able to use their resources to have a flexible provision for their retirement, it is time the rest of savers have the ability to do that as well.
This week’s Budget was a major one for the Government with many changes that will make a difference to people’s bank accounts, and maybe next year’s election, yet it is the Pensions Revolution it contained that will have the biggest and most lasting impact.