The older you get, the faster time seems to go by. Would you believe it’s almost a year since George Osborne opened the pensions “freedom” floodgates?
Until then there was no real flexibility for the vast majority of private pensions, and for good reason. Tax breaks for pension plans – tax reliefs, virtually tax-free roll up and tax-free cash at retirement – were designed to ensure that savers would be happy with them, as well as the guaranteed income until death they could get from buying an annuity.
But sharp falls in annuity rates over some 15 to 20 years saw a big drop in the income levels that people could secure at retirement.
So what did the Chancellor do? A few calculations on the back of a fag packet convinced him he was on to a winning combination of giving generously while actually raking in extra taxes. Magic. Rabbit from a hat.
However, the Financial Conduct Authority (FCA) wasn’t a happy bunny. The FCA and its predecessors may not have covered themselves in glory, as various scandals attest, but they had learned enough from their failures to see a big mis-buying problem looming once the pensions freedom got underway.
Their concerns were ignored. Insiders say they were given a hospital pass by the Chancellor. So to great general acclaim pensions freedom was born last April, five days too late for fools.
Instead of reminding savers that interest rates had simply returned to the norm of the last 120 years (double-digit rates were an anomaly of the 1970s and 1980s), that folks who live longer need to be extra-vigilant, and that many existing plans had high guarantees attached, the cry from the government was “why wait?”. Enjoy yourselves!
It’s also said time flies when you’re enjoying yourself. So has pensions freedom helped to spread the fun around? Consider the following.
The crooks have had a field day. Regulators admit there’s been something of the order of a 300 per cent increase in pension investors being conned out of their savings. Hundreds of changes made to pensions by governments since 1987, coupled with the jargon of the industry, have left most folks totally confused. Not a good start.
Independent research says 80 per cent of would-be retirees don’t want an annuity. Yet virtually the same percentage admit they prefer income in retirement guaranteed to last until they die – which is precisely what an annuity does.
HMRC is having fun, though. So far it’s raised extra tax of almost £1 billion from pensions, some 30 per cent more than expected.
What about freedom seekers? I’m told that some advisers charge 3 per cent of the transferred amount, plus up to 2 per cent a year for “strategic help”. Then, if you’re not satisfied with an income of 5 per cent a year and want, say, 7 per cent after tax, and stick what’s left in a nice and “cheap” stock market index tracker that’s fallen 5.5 per cent over the year, add up what “freedom” has cost you.
Not pretty reading. All told you could be looking at up to a 17 per cent drop, maybe more, in your pension fund, when various charges are added to the 7 per cent income taken.
In one year. And that’s what you risk.
So, remember this. If it looks too good to be true, it is. And if you don’t fully understand what somebody’s trying to sell you, don’t do it.
Alan Steel is chairman of Alan Steel Asset Management