Let’s celebrate the Chancellor’s bravery on pensions – now
perhaps the Government can tackle other mighty vested interests

The new system means care costs for older people may be lower than feared

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When the Chancellor concluded his Budget speech last week, I barely stifled a whoop of joy.

With a few strokes of his pen he had done away with compulsory annuities and simplified the muddled UK pension system in a way that no one had dared to do for years. Then the griping and the backlash began.

Complaints from the many-tentacled private pensions industry were understandable. Even if so-called experts were still analysing the precise implications days later, the financial markets were in no doubt. Companies whose chief business was linked to annuities lost large amounts of their value within the hour.

Here was proof positive of how far annuities had become a money-spinner – not, of course, for those of us saving for a pension, but for those who packaged these payments-for-life, otherwise known as annuities, on our behalf.

Less comprehensible – to me, at least – were the objections from Labour (until it got its act together), some charities and the “care” sector, which fairly dripped with paternalism and condescension. Their central argument was that the changes placed far too much responsibility on the individual saver. Would beneficiaries not behave like imprudent lottery winners, living high off the hog, before falling back, penniless, on the state?

When the Pensions minister, Steve Webb, said he was relaxed about anyone who blew it all on a Lamborghini, he was chided. But he was right. Anyone withdrawing all their pension savings at once will have to pay tax on it, as if it were earned income. Nor will those who rip through their pension cash be a charge on the state; they will just have to live on their state pension – which is being raised to exclude most people from means-tested benefits.

Let us, though, for argument’s sake, posit a purpose-built retirement home or a foreign holiday, or a new central heating system, in place of the Lamborghini. Might that not be an admirable use of someone’s pension money? Being able to take more money at a time when you are still healthy enough to enjoy it is also a plus. For many people it will be far more satisfactory than a drip-feed of, say, £200 a month from an annuity when they may be too old or ill to appreciate it.

Ah, yes, say high-minded detractors, but what about “moral hazard”? That £200 or so a month in later life should have been there to defray care costs. Councils will have to foot the extra bill. But this ignores the current, perverse, state of affairs. It is open to people now to pay down their assets to avoid care costs. If they leave it until they actually need care, councils can try to claw some of the money back. Act early enough, however, and you may get away with it.

Which is one reason why the current system of funding care does not work. In fact, as the Demos think-tank has argued, the only personal assets that can make a big enough dent in projected care costs are mortgage-free houses. But if the new system means more pensioners can choose, and pay for, purpose-built accommodation – in retirement villages, for example – subsequent care costs may be lower than feared, and the quality of life for elderly people a good deal more agreeable. 

As for the new decisions that tomorrow’s pensioners will have to take – decisions supposedly so momentous and complex that they will befuddle our tiny minds – what exactly happens at the moment? Anyone who contributes to a private pension receives mountains of paperwork, the weight and lavishness of which seem increasingly to be in inverse proportion to the forecast payout. The decision on taking an annuity – when, from whom and on what terms – implied at least as many risky variables as the choice between spending cash or saving it, a calculation that most people do every day.

But it is not just our release from the diktat of annuities that we should celebrate, but the way it was done. There had long been criticism of the system, and bitter resentment from new pensioners, now that rates (thanks largely to quantitative easing) are so low.

A small measure of choice was introduced, but a recommended ceiling on service charges was fought tooth and nail. Industry representatives said that such a move would take years, and could make the rates even worse. Well, they would, wouldn’t they? Last week, in a matter of minutes, the Chancellor swept those objections aside.

 So does a government have more power than it lets on? Why for instance, all that shilly-shallying about minimum pricing for alcohol? What about the hidden sugar content in our processed food (far higher than in France)? And what about, to take quite a different example, the sudden intolerance of female genital mutilation, 30 years after a ban came on to the statute book?

Yes, there are powerful groups that resist change in all these areas, but considerations also of health and happiness that are surely greater. If those who lobbied for compulsory annuities can be so summarily dismissed, maybe ministers can summon the courage to show other mighty vested interests  the door.

m.dejevsky@independent.co.uk

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