It’s that time of year again. Chestnuts roasting on an open fire. The holly and the ivy. The bittersweet knowledge that you will be picking pine needles out of the carpet until at least April.
The turning of the year has always been imbued with a mystical significance, as lengthening darkness gives way to the first hint of longer days and a promise of rebirth and renewal. A time for reflection on the year that has past. And across the land at this time of year the siren call goes out from marketing departments “can someone write a review of the year?”!
This year it’s my turn. My usual approach would be to trawl through each month pick a slightly quirky topic and make a, hopefully, pithy and insightful comment about it.
So in 2014, for example, February would feature Greg Barker, the Minister of State for Climate Change, who was quoted that month as saying that those approaching retirement should consider using their savings to install solar panels, as these could deliver a better return than a pension. Greg pointed out that in recent years, prices for solar panels have dropped and Government figures show that the typical rate of return is between 5% and 8% annually. Many pension commentators missed this early hint that the Government was looking at alternatives to annuitisation.
Or I could note that September 2014 was full of dire warnings about the pension consequences of a Scottish yes vote for independence. “Independent Scotland faces £100bn public sector pensions bill”, “Scottish independence risks pension crisis at RBS” and “Scottish Independence will rob pension schemes of at least £5bn per year”, being representative of the industry’s measured contributions to the debate. Sorry, I made the last one up. Obviously, it was a Scottish Chancellor who robbed our pension schemes of £5bn a year, not the threat of Scottish Independence.
But that approach is a bit stale and hackneyed. Besides, in pension terms, 2014 wasn’t about the whole year. It wasn’t about a month or even a day. It was about the 14 seconds (approximately) it took George Osborne to say.
“Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear: no one will have to buy an annuity.”
That moment was genuinely revolutionary and, as far as I’m aware, no one saw it coming.
It’s a very simple concept. People save up a pot of money whilst they are working and then draw on that pot of money as and when they need to when they are no longer working. Defined contribution (DC) pensions shouldn’t be any more complicated than that. And now it seems they’re not.
I find the notion, oft voiced at the time of the announcement, that significant numbers of pensioners who have behaved prudently throughout their working life to build up a reasonable pension fund will cash in their pensions to blow it all on Lamborghinis, Lobster and Louis Vuitton, a bit patronising. No doubt some will. No doubt some should, but most will realise that they are likely to live a long time and will invest their funds to provide an income.
As the old saying goes; necessity is the mother of invention. Providers who looked into the future and saw their lovely steady stream of annuity business threatened with extinction have had to innovate and think about how they can help savers achieve better outcomes in retirement.
The budget announcement together with the subsequent announcement abolishing death taxes on pension funds will remove barriers to saving. This is welcome, because the most fundamental problem we still face in terms of retirement provision is people failing to save adequately.
However, the year end is a time of not only looking back but looking forward. So if 2014 was dominated by the biggest shake up in pensions in a generation, what might the future look like?
I think we’re still mid revolution so divining where we might end up is a bit of a challenge, but I’ll dust down my crystal ball.
My colleague Alan Collins has blogged previously about the death of collectivism and DC pensions, given the apparent stacking of the DC odds in favour of individualism. Already there are plans to provide pensioners with a credit or debit card allowing them access their pension savings after they turn 55, the logical extension of being able to treat your pension fund like a bank account.
The Chancellor’s changes have eroded the differential’s between pensions and ISAs, which begs the question, do we need two slightly different tax advantaged savings vehicles? There is evidence that pension tax incentives do nothing to encourage an increase in the overall savings rate. The amount you can save into a pension scheme on a tax exempt basis has been reducing as the ISA limit increases. If convergence continues will we see a single tax efficient personal savings product? People seem to like ISA’s whereas pensions are a source of mistrust for the public. So could the abolition of pension tax relief for individuals hold an attraction for a Chancellor struggling with a large deficit and lower than expected tax receipts?
Will hindsight tell us that 2014 was the year that saw the beginning of the end of personal pensions as we know them? I don’t know the answer to that question, the crystal ball has gone a bit misty at this point, but it seems a little more plausible now than it might have done 12 months ago.
All revolutions devour their own children. Roll on 2015!