Midst the cacophony of the Brexit debate and the speculation over the shape of the next budget, the actual effect of the last major changes to the pension system is being glossed over. This is unfortunate as how the current system is performing should be key to the process when it comes to making decisions on how to move forward.
Assuming that the Treasury is concerned about having people provide for their own future, and not just looking for tax-savings to pay down the debt, the actual results of the first year of pension freedoms flag some causes for alarm.
‘People who have worked hard and saved hard all their lives… should be trusted with their own finances.’ the Chancellor declaimed in his 2014 budget speech when he announced the breaking of the annuity shackles and the introduction of pension freedom. Yet, he simultaneously announced a guidance programme in order to give people information on pensions, because it was felt that they didn’t know how to plan to make their savings last for the rest of their life. It is this contradiction that has bedevilled the whole process and may now be leading to major problems after a turbulent year in the markets.
Prior to these changes, all those who had pension pots had either to buy an annuity or a drawdown product, and the vast majority of those with smaller pension pots went down the annuity route, as product providers and advisers nudged them towards the safer option. Now a combination of the high up-front fees for advice post RDR and the constant encouragement of the media means that many are making the decision for themselves.
As annuity sales have wilted, three key other areas have blossomed. Firstly, some have taken their entire pot out and paid the tax. Whilst it’s impossible to know the exact destination of this money, some will be saved for retirement, some undoubtedly went on current spending meaning that there is an increase in the number who have nothing saved for retirement.
Secondly, some have been the victim of scammers and have lost part or all of their money. Given the suddenness with which people found themselves in control of a pot of money there were clearly golden opportunities for scammers and, according to consumer programmes and experts, there are significant numbers of people who have been defrauded of their lifetime savings, again increasing the number of those who now have no retirement savings.
Finally, there is a significant segment that rejected the idea of annuity, given the endless media, regulatory and political comment about what bad value they were, particularly if you died early. This led many into unadvised drawdown purchases where the unfortunately timed collapse of the FTSE has meant that many are suffering from pound-cost-ravaging of their pension pots and will therefore have far less money to live on in their old age and will now run out of money much earlier, once more increasing the burden on the state.
Rushing to make changes to the tax incentives for saving whilst ignoring the mixed outcomes of the prior changes to the decumulation stage is dangerous and does tend to back up the argument that the government is more interested in getting large tax increases to offset their debt problem rather than to truly create a decent pension environment.
Budget 2016’s pension provisions should seek to ameliorate the problems introduced by the earlier reforms before rushing headlong into changes to the savings encouragement stage. Otherwise we will end up with fewer and fewer people with savings for their old age and an increasing pressure on taxpayers to plug the gap. If that happens, it won’t just be Bobby McGee who’ll be singing the blues.