A general election is coming. How do we know? Because George Osborne is determined that we should have a bounce in our step come next spring.
How else to explain his decision to rewrite the rules on pensions, so that from April, a month before the vote, pension-holders can start to withdraw their savings and begin to do what they like?
They will be able to treat their pension pots like bank accounts, to be raided when they want and how they want. The old restriction that anyone over 55 could only take 25 per cent will go. Said Osborne of the pensioners, many of whom are the Tories’ bedrock supporters: “From next year they’ll be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax-free.”
Pension campaigners have hailed the move, saying the Chancellor is removing inflexibility, that savers can choose what financial products they wish to buy.
“People who have worked hard and saved all their lives should be free to choose what to do with their money, and that freedom is central to our long-term economic plan,” said Osborne.
It’s impossible to knock the ideals of Osborne or those pushing for change – it’s the pensioners’ money and they should be able to decide what to do with it.
But they’re presuming far too much. Rather than buying other savings instruments, people may just as readily splash their cash on home improvements, repaying debts, clearing credit cards, cars and holidays. Some might give the money to their children and grandchildren, as Osborne predicts. Equally, some may invest in other products, as the campaigners maintain.
However, the numbers affected are huge – 13 million people hold defined contribution pensions. How many of those are likely to be reckless and splurge the lot, leaving them with nothing for their old age?
If it’s only 10 per cent, that is 1.3 million. And, human nature being what it is, I suspect that could be on the low side. Twenty per cent is 2.6 million. That’s an awful lot of folk with no nest egg to fall back upon, and years still to live.
Government, especially the Treasury, can be pretty hopeless at predicting what human beings will do, how we will react or behave, especially where money is concerned. Remember how taken aback ministers and officials were when depositors immediately began queuing to get their money out, as soon as news broke in 2007 that Northern Rock was in difficulty. In theory, there was a scheme in place that would guarantee £2,000 in any bank and up to 90 per cent of the next £33,000 – meaning someone could receive £31,700 if the bank went under. I would wager that most of those lining up outside the branches had deposits that fell nowhere near that limit. Effectively, all their money was safe, but still they queued.
Official notices and advice were ignored. Something similar could occur with pensions.
Of course, it does not make sense to spend it all at once. Of course, people are capable of making their own decisions, taking out the money and using it to purchase shares, property or other forms of investment.
To that end, the Government will provide guidance, informing investors of some of the basics involved. Some, it could be many, will heed the warnings. But equally, some, it could be many, may choose not to.
Does Osborne’s “long-term economic plan” make provision for looking after pensioners, once they’ve cleaned out their pension pots, and had their longed-for cruise and safari holidays, and bought their conservatories and had their gardens landscaped? I hope so.
It’s possible that part of his thinking centres on the boost in consumer spending that is going to result from this newfound pension freedom. Home improvement and holiday operators, anyone involved in big ticket retailing, can look forward to a bonanza.
Come next April, pensioners, many of whom are Tory voters, will be basking in a pre-election, feel-good mood, as will the high street. Perhaps mindful of the longer implications, however, Osborne wants us to pay an extra fiver a week to boost our state pensions. So those who drain their private pensions may at least have a bit more to live off.
Reformers have been arguing that the system needs to be more flexible. Well, now they’ve got it.
I would rest more easily if I could point to professional managers who are at the top of their game, who regularly beat whatever index is put in front of them. Alas, that does not occur as frequently as their fees suggest it should.
If the pros find it so difficult what hope is there for the amateurs, for the novice investors who saved up their pensions because they had to, and now find they can play the markets? Hitherto, they’ve shown little interest in investment, they’ve never had any spare cash with which to learn the ropes. Now, they’ve got a tidy lump sum burning a hole in an account somewhere. It does not bear thinking about.
I’d be more reassured, too, if I thought the great share-owning democracy ideal, born of Mrs Thatcher, had taken root and we were all financial sophisticates. It never happened.
Instead, providing evidence again that people do not behave as governments wish them to, the public bought the shares, all right. But then they promptly sold them, making a tidy profit, but not sticking around to learn the ropes of investing in the stock market – and crucially, experiencing what happened when those shares that went up, immediately on privatisation, subsequently headed down.
So determined is he to give pensioners their freedom that Osborne is removing the one protection against them spending all their cash and have nothing left. Previously, they had to buy an annuity to provide an income for the rest of their lives.
That was regarded as too onerous, so it’s now gone. It was burdensome, but it was also there for a reason.
Pensioners are to be on their own, able to do what they wish with their cash. They can call on professional help should they want but equally they can prefer not to, or they can ignore it. There’s the new “guidance guarantee” but it’s hard to imagine how that will supply the necessary detail.
Ros Altmann, the pension campaigner, said yesterday: “Of course there are risks and some people will be irresponsible, but I do not believe that will be the majority.”
It’s the size of the “some” that bothers me. Some can very easily become a lot, can very easily be too many. In that case, in the pursuit of freedom we will have a disaster on our hands.Reuse content