At the beginning of this year, Pensions Minister Steve Webb called for pensioners to be given the power to switch annuity providers, in much the same way as mortgages can be switched. At the time, insurers protested that this was an unfair comparison, that annuities were much more complicated than mortgages. Well, they would say that, wouldn’t they?
Annuity providers had been rightly criticised, for confusing, less than transparent, products, and for charging unnecessarily high commissions.
Regulators have criticised the sale of these contracts, describing the market as not fit for purpose. In a report last month, the Financial Conduct Authority warned that middle-class savers were being left thousands of pounds out of pocket after being sold poor value or inappropriate contracts which, once signed, could not be changed.
Fast-forward less than three months, and Chancellor George Osborne has announced that savers will be able to withdraw their entire pension pot in cash from 2015. I did suspect that Steve Webb’s earlier announcement was only just a hint of what was to come.
The Treasury estimates that about one third of retiring workers will take advantage of the ability to access their pension pots at a faster rate giving many a source of funds with which to pay off debts, or invest elsewhere, or buy a Harley Davidson (or a Lamborghini as Steve Webb suggests) or even pay more visits to the local bingo hall. I have a feeling it will be significantly more than one third.
Currently, those over the age of 55 who want access to their savings must effectively purchase an annuity, which turns the pot into an income for life (or, until “retirement comes to an end”, as Ed Balls euphemistically put it).
So, all good news? Maybe. But how tempted will some – most? – people be to “cash in” their pension and spend it on something we sensible types would call frivolous? How many people will now comfortably allow their debts to build up, knowing that they have a windfall coming? Let’s remember that a pension is designed to provide a steady income. But there’s the higher flat-rate State pension arriving in 2016, so that’s our safety net.
But hang on …
As mentioned above, the requirement to buy an annuity exists to help people receive a steady income during their whole retirement. The annuity market could be destroyed; this is a market that needs healing, not ending. Fewer people will buy annuities and many of those who decide to will do so because they believe they will live longer than average. As a result they will become more expensive.
Financial experts are predicting a surge in buy-to-let investing as retiring pensioners, freed from having to buy annuities, pour the money into property instead, and in the process exclude the young (or those without help from the Bank of Mum and Dad) from the housing market almost permanently.
Removing the requirement to turn your savings into a pension also begs the question of why the government needs to provide tax relief. Employers may also begin to question why they should contribute. If a defined contribution pension is just another long-term saving plan why should the employer pay?
Before yesterday, Britain was moving towards a proper pension system, thanks to recent improvements, auto-enrolment and the flat-rate state pension. With this announcement, it may all become undone. We must hope that this does not happen, and that there are more positives than negatives, but it may not be the pensions panacea that some are proclaiming.