Despite bleatings from some self-serving sections of the insurance industry that Osborne’s pension plans will be disastrous, it could actually prove to be the opposite.
Handing over responsibility and choice to people is likely to encourage them to get much better outcomes for their retirement cash, rather than make them suddenly behave recklessly and blow it on holidays.
And warnings that the move is a death knell for annuities – Barclays reckons the market could shrink by two-thirds in just 18 months, for instance – are far from the mark.
Sure, in the short term the surprise proposal has been a disaster for insurers. Annuity specialist Partnership has been hardest hit, losing half its stock market value immediately after the announcement. The company’s shares took a further big battering today, slumping another 10 per cent or so. Meanwhile, the UK’s biggest insurers have seen billions wiped off their values.
But the change actually gives insurers a challenge: 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.
Robin Williamson, technical director of the Low Incomes Reform Group, suggested: “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 – a concept much easier to grasp.
Millions are already used to stashing cash in tax-free individual savings accounts instead of blowing 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 .