As I paid £8.40 for two pints of London Pride in my south-west London local on Wednesday night, I raised a glass to the Chancellor. Cheers! That penny off the price of a pint would make a hell of a difference.
But amid the froth of the Budget, I do have serious cause to thank George Osborne. He’s given me, and 13 million others, complete freedom. Last year, he lifted the barrier preventing us from withdrawing our defined contribution pensions and allowing us to do what we like with our money. This week, he went a stage further, saying that those who had already bought annuities before the rules forcing pension-holders to buy them were scrapped could now sell them. He’s launched a consultation that allows people to cash-in their annuities. They will get a lump sum or they can transfer it to their pension pot which they may draw down.
It was unfair: many never wanted the annuities in the first place, and then had to watch, stuck, as future savers had the obligation to buy them removed. These are bold strokes by the Chancellor, perhaps the most reforming of his period in office. He’s turned an entire industry on its head, doing away with restrictions and rules, taking a simple, but true Conservative, approach of saying: “There you are, it’s your money, it’s yours to manage.” It’s a policy, too, that Labour struggles to argue against. The opposite is control and intervention, and that smacks of the word Labour likes to eschew these days: socialism.
I admit, though, to having mixed feelings. The argument for the relaxation goes like this: professional investors did such a lacklustre job, by and large, and charged large fees for the privilege, of handling our savings that we should have the opportunity to have a go ourselves. Osborne is counting on us not drawing down all our cash in one go, but keeping it safe and investing it as carefully. But why should we be any better than the market sophisticates?
It’s too easy to dismiss them, and say they were ripping us off, they were lazy, and were not conscientious. They had access to data and analysis that we ordinary punters will never have. They had collective years of experience that we, as individuals, taking decisions on own, will not match. Still, they performed poorly, so the baton has been thrust in our direction. But do we really know what we’re doing? How many of us actually know how the markets work?
It’s all very well the Chancellor pulling down the fences and allowing us to roam freely with our pension money but he’s not equipped us with the tools to do so. Finance may be taught at schools today, but generations of us missed out. The eyes of many people glaze over if they see letters from finance companies and documents bearing numbers and words they simply do not understand.
Already, there are warnings galore that Osborne’s move will see mis-selling on an epic scale. We had mis-selling before, and that was when our ability to manoeuvre was tight; imagine what could happen now we can do as we please. And who is issuing these dire notices? You have to laugh: only those same major investment companies that have previously put up their hands to mis-selling. That must tell you something. It says they’re all too aware of the gap that exists between the unsuspecting consumer and the cynical exploitative practitioner.
It’s to be hoped that, in his desire to let us loose, Osborne is not woefully under-estimating human nature. He may expect that we will remain cautious, but I’m hearing chat that suggests the reverse. Some may want to reduce their debts, to pay off their mortgages. Still others, however, are talking excitedly about splashing out on a new car, a holiday, a conservatory or dipping into the buy-to-let market and purchasing a flat.
It’s their money, of course, and why should they not enjoy those pleasures? But, once spent, that money has gone. As for buy-to-let, they may think they’re being clever but that sector brings its own risks. Yes, I know I’m being churlish and downbeat, but I’m also conscious of this: that people are living far longer. Who is going to pay for that extended old age is already a moot issue for society, and that’s before the great pensions splurge.
In Australia, folk have been enjoying the same freedom over their pensions now being extended to Britons. So it must give more than a little cause for concern that the Canberra government is considering introducing the very same annuity system that we’re scrapping. A report by banker David Murray suggests either forcing the purchase of guaranteed income products with pensions, or providing incentives for retirees to buy them.
This is because the Aussies have behaved irresponsibly. Research found that 25 per cent of pensioners who had enough in their pension pots at 55 to see them through the rest of their lives had spent the lot by the time they were 70.
As for claims that the withdrawn money was being re-invested, 44 per cent of those who took a lump sum used it to pay off debts and a further 28 per cent opted for a holiday or car. Worse was that many people borrowed ahead of impending retirement and used their pension money to pay off their debts.
Osborne is earning plaudits. He’s given people what they think they want – possibly in the short-term. But it’s in the long term where the problems may emerge.
They may have been widely loathed but annuities were there for a reason. That objective – of providing annual retirement income for the rest of their life – has not diminished. Annuities may have perished but the objective in having them in the first place is just as strong as it ever was. It’s to be hoped that in his desire to please, Osborne is not causing another major social problem to stack up in the years ahead.Reuse content