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Who will win and lose in the Pensions reform?

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If you are over the age of 40 (and I guess most of you are!) any mention of ‘pensions’ will make you sit up and take notice. (If you are under 40, believe you me, you will soon!). The most notable feature of George Osbourne’s was what has been described as the most significant reform of pension provision in recent years—and all the more remarkable that it was announced in a budget, rather than given its own space for discussion and review.

(Is it just me, or does this picture look like Osborne is about to punch me in the mouth?!)

The impact even on those in the know was captured by the Guardian:

The City was stunned by reforms that will mean people will not have to take out annuities when they retire and will remove all restrictions on how new pensioners have access to their pension pots.

It was clearly designed to be a vote-winner, particularly amongst the older population (who are more likely to vote than the young) and particularly amongst those likely to defect to UKIP. But a number of commentators have characterised this as a disaster:

The chancellor’s pensions revolution is a disastrous mistake. Millions of pensioners will suffer lower retirement incomes as a result of the Budget announcement, and it could have huge unforeseen consequences for the housing market.

In one swoop, Budget 2014 destroyed UK pension policy. The chancellor’s announcement that individuals will no longer have to buy annuities is possibly the most catastrophically bad policy decision made by this government. It will almost certainly have to be reversed, if it can be.

Why is it such a problem? Essentially, because the evidence is that, given a choice, people do not by and large do the sensible thing on retirement, and restrict their immediate expenditure for the sake of having longer-term, secure income. There is tangible evidence that, with the obligation to buy an annuity (which spreads out the income from the pension pot), people do indeed spend now and repent at leisure.

Other experts said there was evidence from Australia, where people have been freed from any obligation to buy an annuity, that many pensioners are running out of money late in life. In a rapidly ageing society, the potential for increased late-life poverty is clear.

Nick Palmer, former Labour MP for Broxtowe and Labour candidate in the next election, spells out the consequences as he sees them:

[The change] is hugely popular. A poll shows it’s approved by 66% to 3%. Moreover, Labour has broadly accepted it, so all the parties are in favour. But one reason I’m hoping to get back to Parliament is that I’d like to put awkward questions, even when something is wildly popular: politics is too driven by polls and vote-hunting, by all parties.

What’s the snag? It’s this: annuities were there for a reason: to protect the benefits system from abuse. Now the requirement is being abolished, there is nothing to stop us from spending any capital we’ve got on cruises and – as the Pension Secretary cheerfully suggests – a Lamborghini sports car – and then turning to the taxpayer and saying “Sorry, I see to have run out of money, can I have Housing Benefit and all the other means of public support?”

The case for this is that it’s actually our money. Putting aside for a moment the point that many people have no savings at all: let’s assume someone’s done well. If he’s saved up, why shouldn’t he spend it on Lamborghinis? No reason at all – except that the pension pot savings were tax-free. This was part of an explicit deal: if you put aside money for retirement so you wouldn’t be dependent on the State, the State would in return waive the tax. The deal is now being unilaterally cancelled: he can spend the money as he likes and then use the State to help afterwards.

So could we say that anyone who takes advantage of the offer should waive the right to benefits? Not really, unless one wants to see elderly people literally homeless. There is a secondary issue here: pensioners will now be bombarded with offers from the financial industry to sign up to all sorts of schemes to use their money. Many pensioners will be financially savvy and will make good judgements. Some may not, and will run out of money sooner than they expected, ending up depending on the benefits.

20140308_brc482One interesting observation is that this kind of move is Thatcherism at is most defined—the freedom to do as you wish with your pension pot is seen as offering a very close parallel to having the opportunity to buy your own house, or purchase your own shares. And what has been the long-term impact of these moves? In the first, that home-ownership, particularly amongst the young, has plummeted, as they have been priced out of the market. In the second, it is that most shares have been hoovered up by institutional investors. Mass home-ownership and mass share-ownership have been illusory.

But a bigger concern for me is this: What assumption is Osborne’s policy making about what it means to be human? It seems to me that the picture we are getting is that all retired people are confident, knowledgeable, secure, able to resist short-term pressures in favour of longer-term benefits—and above all, individuals. Such people do not need protection, from their families, from financial advisors, from their own weaknesses. They are the kind of people that, well, the members of the Cabinet would aspire to be, and perhaps think they themselves are. But of course, the big difference is that all the members of the Government are from privileged backgrounds, and so have other means of protection from their own mistakes and the guile of others.

The winners of this decision will, in the end, be the financial services industry. The losers will, undoubtedly, be pensioners themselves. Watch for the headlines of pension poverty in 10 or 20 years’ time. But we are all losers when we imagine that each person ‘is an island, entire of itself.’ The loss here is of a vision of society as community, where we bear responsibility for one another.

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2 Responses to Who will win and lose in the Pensions reform?

  1. Chris Bainbridge March 25, 2014 at 6:03 pm #

    Ian, as I understood this, one of the points in favour was the removal of means tested benefits for the elderly and the introduction of a single tier pension. As I understand this, it means everybody will be entitled to a state pension of £144 per week irrespective of their other pension arrangements. So even if you completely blow your pension pot you will be no worse off than somebody who never saved for a pension.

    I accept that this does not address the tax free aspect, but then ISAs are tax free and nobody objects to you blowing that on a Lamborghini.

    Finally should we be addressing the iniquitous “management” costs of annuities which regularly under perform the market ? Will we now see the financial industry actually working to provide decent annuities rather than the very poor ones recently?

  2. Ian Paul March 27, 2014 at 9:30 pm #

    The single tier *state* pension was a quite separate measure which was unconnected with the law on personal pension funds.

    ‘So even if you completely blow your pension pot you will be no worse off than somebody who never saved for a pension.’ So why should anyone therefore invest in a pension? And why should the Government any more offer tax breaks to encourage people to do so?

    It is certainly the case that the annuities market needs reform, but this was not it.

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