THE weekend after the Chancellor unveiled his so-called pension freedoms in March 2014, I wrote here that it was a mis-selling scandal in the making.
At the time I was aware that my view might seem rather negative. Many people told me so. And yet, since the reforms took effect in April it’s become clear they have the potential to be even more disastrous than first feared.
Last week the Association of British Insurers (ABI) revealed that savers have taken £4.7bn from pensions since April, almost double the figure given just days earlier by HMRC. Both sets of data were incomplete, for various reasons, and the fact is that we don’t really know how much has been taken. We certainly don’t know what people are doing with their cash, because the Treasury hasn’t bothered setting up a framework to capture it.
There’s a very good reason for this, of course – the full picture would reveal just how much extra tax it’s raking in from pension savers walking into the trap it’s laid with the new rules.
It’s now widely believed in the industry that pensions freedom was designed primarily to boost Treasury coffers in the short term, whatever the consequences.
So, not good. Then there’s the scams. Last week the Phoenix Group claimed it had identified more than 1,650 suspicious companies involved in scams. The main fraud threat now comes from dodgy Sipps (self-invested personal pensions) and investment firms. The new freedoms have given them – and the pension “review” companies that have sprung up from nowhere – a licence to fleece.
But the real long-term damage will arise simply from people making the wrong decisions.
Derek Stewart, managing partner at Sam Wealth in Glasgow, suggests the freedoms give people with relatively little knowledge the “opportunity to bankrupt themselves in retirement for a short-term gain”.
He points out that before April it was generally accepted that drawdown plans were suitable only for people meeting certain conditions (such as a minimum fund of £100,000, other sources of income and experience of investments).
Nothing’s really changed, yet drawdown is now the mainstream choice, and often without advice.
“Prospective clients are saying, ‘I’ll strip out my pension over the next 10 years because I don’t expect to be healthy into my 80s’,” said Stewart. “On one hand that’s great because they’re getting a real benefit from their savings. But what happens when the fund is depleted and they have got used to that higher income?”
Want to know where this is heading? Australia has pension savings levels the envy of the UK, yet there are concerns over its policy of letting people do as they like with their retirement cash. Calls for new restrictions grow louder by the month.
The State Market Foundation last week reported that one in four retired Australians have emptied their pension pot by age 70, and 40 per cent by the time they’re 75.
Back here the official line is that most people are being sensible, so it’s all going to be OK.
All we hear from the Treasury, the DWP (and from too many influential industry and media pundits) is that pensions freedom “is working”.
But it’s a delusion borne of self-interest, and it’s dangerous.