Simon Read: Lamborghinis? Pensions minister Steve Webb's gaffe shouldn't detract from transference of power

 

Steve Webb, the coalition's pension minister, is well-known for speaking first and then explaining what he really meant afterwards. At times he says things with an obvious twinkle in his eye simply for their shock effect.

It allows him to test theories and potential policy in public without the responsibility of having to back them up. When challenged, he responds with phrases such as: "I was just putting it out there." That may sound like a normal politician's weasel-worded get-out clause, but Mr Webb often uses the method to great effect.

As he did quite admirably this week. A chance remark on the radio got him on the front page of a downmarket tabloid. "Job done!" he probably said proudly to his team of aides.

The essence of his message, that pension pots can be used to buy Lamborghinis, is far from the stupid thing it sounds. It neatly sums up the profound change in pension planning that the Budget changes have put into effect this week.

In simple terms you will be able to decide for yourself what to do with your pension nest egg. No longer will you be forced to buy an expensive and poor-value annuity. Instead you will be allowed to use the cash in any way you like, although you will still have to pay tax on it when you take it out of your pension pot.

But warnings that the move is the death knell for annuities – Barclays reckons the market could shrink by two thirds in just 18 months, for instance – are wide of the mark.

The change actually gives insurers a challenge that they will be forced to embrace if they want to continue making fat profits. (There's no "if" about it, of course.)

Their challenge is this: to turn their expensive, poor-value products into fairly priced ones with decent payouts. If they can do that then it will be logical for older people seeking an income in retirement to make a positive choice and buy an annuity.

Read more: How to make the most of the pension revolution
Lamborghini gaffe shouldn't detract from transference of power
New pension freedom may lead to care fees problem

Robin Williamson, technical director of the Low Incomes Tax Reform Group, said: "The vastly more flexible rules for drawing down pensions without necessarily taking out an annuity should force providers to be more competitive in what they are prepared to offer pension savers."

And early reaction suggests that the insurance industry is up for the challenge. "There will be an appetite to engage with the challenge of a reformed framework, and make it work, just as providers in the market will innovate to meet the demand created by the new rules," predicted Huw Evans, deputy director general of the Association of British Insurers.

That innovation is likely to see a drift towards lifetime savings schemes, rather than specific retirement savings. And that's a concept that is much easier to grasp.

Millions are already used to stashing cash in tax-free individual savings accounts and don't feel tempted to withdraw it all and blow it in an orgy of spending. When they're given a more flexible pension, they are likely to adopt the same sensible approach, not least because leaving their cash within a pension for as long as possible will allow it to grow tax-free.

s.read@independent.co.uk

Twitter: @simonnread

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