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Pension’s regime collapses like a House of Cards

Pension’s regime collapses like a House of Cards

Is the recent pension reform by Chancellor George Osborne, which has caused mayhem in the post-retirement market, a stroke of genius or a political masterstroke worthy of Machiavelli? The scale of his reforms took everyone by surprise, last Wednesday; in particular, the abandonment of the compulsion to buy an annuity or drawdown product with one’s pension savings and to allow full access to the money, albeit taxed at the individuals marginal rate.

The Government has staked out a position on the moral high ground; they are merely freeing pensioners to do whatever they wanted with their own money. This was a stratagem worthy of Mr Underwood, the scheming Chief Whip in the US version of the House of Cards, as the opposition was left with the unpalatable argument that people could not be trusted with their own money, hardly likely to be a vote-winner.

However, there are a number of issues with the Chancellor’s announcement that have been successfully stifled by clever politics but are relevant nonetheless.

The first point is that the original relationship between tax relief to save for one’s pension and the compulsory annuity purchase with the money saved made sense. It ensured that the individual whom the state had helped to save for a pension was far less likely to become a burden on the state because he or she now had an income for life. This link has now been broken and the logic that allows the individual to essentially defer tax, and even reduce it by taking the money in stages in their later years seems to disadvantage today’s taxpayer without providing any benefit for the future taxpayers.

Secondly, the argument that the annuity market needed the abolition of compulsion to become efficient completely ignores the fact that there are other highly competitive markets, such as car insurance, which are based on compulsion and that successive reports on the annuity markets never mentioned compulsion as an issue that was stifling the market.

Thirdly, the idea of pension saving is to provide income security for the whole of one’s retirement. Actuaries may not have been particularly successful at estimating longevity in recent years - witness the closure of so many defined benefit schemes – but moving the onus to the individual for calculating the speed to draw down one’s savings doesn’t sound like the answer.

Of course, there have been those holding the view that this is more of a political stunt than a well thought out response to problems within the at-retirement market. They point to the curious co-incidence that ”pension liberation” will become a fact in April 2015, just weeks ahead of the next General Election. And older people are more likely to vote than younger ones. One might say that this would be likely to pull some older voters back from the arms of UKIP and into the Tory fold. One might very well think that; I couldn’t possibly comment!

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

Google Plus: TomMurray

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