PENSIONS are often seen as complex, confusing and unexciting, though there’s no doubting their importance.
It’s a mark of success as a society that we’re all living longer, but it presents actuarial challenges which will be familiar to anyone who has seen their hopes of a final-salary scheme disappear or had to increase their contributions.
But the changes announced by Chancellor George Osborne in last week’s Budget seem to have sparked more widespread interest. Broadly speaking, from next April over-55s will be able to access their private pension pots and spend or invest them as they like. The requirement to take out an annuity will disappear, though drawing them down will potentially attract tax liabilities. He said this was a matter of trust – that the government should be less prescriptive about how people use their own money.
There have been numerous portents of doom about this proposed change. It is claimed this will decimate the £14 billion annuities market, restrict the housing market for aspirant first-time buyers as savings are ploughed into buy-to-let properties, or lead to dwindling pension pots if these are kept in low-interest current or savings accounts, rather than put into higher-yielding investments.
But the biggest fear seems to be that pensioners may splurge their hard-earned stash on fast cars, big houses and foreign holidays, then leave the state to pick up the cost of supporting them and paying for their care later on. Pensions minister Steve Webb seemed to confirm that older people could treat themselves to Lamborghinis if they wished. James Lloyd, director of the Strategic Society Centre, claimed this move would be both a “catastrophe” and a “disastrous mistake”, and that it made favourable tax treatment for pension saving less justifiable.
The evidence from other countries with similar arrangements, such as Australia, does suggest that when presented with these choices, few will voluntarily invest in annuities and some will purchase luxury goods or quality-of-life experiences. But even though most do opt to take cash, a majority use it to pay down debts or pay off mortgages, invest in other savings vehicles or investments, such as property.
There is also a lack of clarity as to whether or not, if a private pension sum is drawn down, the financial assessment for residential care would be adversely affected.
The annuities model does make financial sense for many, but it does not easily reflect the modern world of working longer and more flexible retirement. With the default retirement age gone and with the state pension age due to rise, many people are working on into their late 60s, 70s and beyond, perhaps dropping down to fewer working hours or days. Greater flexibility gives them the option to supplement their income in a way which an annuity would not.
Other Budget changes may also affect older people. The extension of cash Isas and abolition of the 10 per cent income tax rate on savings will both offer benefits to savers but, because taxing earnings from interest is quite inefficient, cost the public purse little by comparison.
However, these benefits are likely to accrue to the well-informed and reasonably affluent. There is already a problem of take-up of the lower savings rate: if pensioners don’t declare their income as coming from savings they may already be paying the higher standard rate, a detriment which could now double. And the thresholds and investment requirements for both Isas and the new voluntary class 3A National Insurance Contributions, which allow people to save to gain increments on their state pension, will invariably be practical only for those with the money to invest up-front.
So it will become more important than ever that people should have access to high-quality financial advice and guidance. People who choose not to annuitise their savings should understand the consequences – for example, most people, and women in particular, tend to underestimate how long they will live. «
• Brian Sloan is the chief executive of Age Scotland