It has been
described as the Chancellor George Osborne “pension revolution”, which will
result in a sea change in the way people access their retirement savings to
fund their retirements. Under the
coalition government’s proposal, from next year, millions of people with
defined contribution pensions reaching the retirement age will be totally free
to spend their pension pot in any way they wish. Without doubt, this is a radical change to
the previous regime, which compelled many retirees with defined contribution
pensions to buy an annuity, a financial product that gave them a determined
annual income for life.
Indeed, this pension reform enabling retirees
on mass to spend their savings accumulated through their working life in one
go, rather than in regular installments over their lifetime is most likely to
have widespread social and economic implications with some clear winners and
losers.
Probably the
vendors of those expensive two door sports cars are gloating over the prospect
of pensioners flocking into their showrooms with a stack of cash ready to buy
their new set of wheels. But while
Pension Minister Steve Webb may have grabbed the headline when he said that
pensioners should be free to buy Lamborghinis if they wanted to, in reality
that is unlikely to happen. Looking to the land down under, Australia, where
there is no obstacle to pensioners being able to withdraw lump sums of money,
recent evidence indicates that most retires opt to either invest their money,
or pay back debts. Only a few splashed it out on an expensive sports car or
holiday homes. So maybe Chancellor
George Osborne might have a point when he said that new pensioners can be
trusted to manage their own finances.
But with
more freedom of choice, with pensioners no longer railroaded into annuities,
that could mean a rise in DIY investment planning, in other words a boom for
companies educating pensioners on investments as pensioners try and become more
investor savvy with the aim of hunting out higher returns on their investments.
So investment planners, educators could be the clear beneficiaries to the
pension reforms. However, the down side here is that pensioners could also
become prime targets for scammers.
Unscrupulous rogues offering bogus investment opportunities maybe lured
into targeting pensioners even more, knowing that they have access to funds.
Demand for
higher yielding investments will be even higher following the pension reforms.
So perhaps there might be a boom in the buy to let investment market, according
to Mark Giddens, partner of accountancy firm UHY Hacker Young. However, a
recent report by the City watchdog’s review of annuities throws cold water on
that view. Apparently, the average pension pot was only £17,700, according to
the report, which would not be enough for even a deposit on a garage in
London. If pensioners start scouring
for higher yields, this could also mean a greater risk to their capital.
"Unfortunately, as is often the case that the higher the yield, the higher
the risk," said Mr Giddens. This
might means an increase in demand for share investments over bonds, the former
being viewed as a higher risk asset class.
Nevertheless, there will be the State pension to fall back on should
their investments turn sour. Indeed, the new flat rate state pension of just
over £7,000 a year, viewed as generous by the Chancellor, will be there to lean
on. So perhaps the strategy is to
encourage pensioners to take more risks, not on the road with their Lamborghinis
but rather with their investments in the economy. Surely every economy needs risk capital to
grow, but it seems rather odd to turn to the pensioners for this. In any case what this might mean is that
demand for investment planners with successful track records, under all market
conditions, maybe higher than ever.
The Treasury
is also going to be a big beneficiary of the pension overhaul. Certainly,
pensioners will be free to withdraw their pension pot, but only after paying 40
percent taxes on the entire sum.
Furthermore, because the funds would then become part of a pensioner’s
estate it would also be liable to capital gains tax, unless invested in a way
to avoid the £325,000 inheritance tax threshold. So it is no surprise that the
policy maker is also likely to be a main gainer. Although retirees will have
the choice to withdraw their funds in small amounts over the years, stick with
annuity, or alternatively seek tax planning advice. Hence, another potential
gainer could be tax planners.
The pension
overhaul may also improve family cohesion. Recent surveys have shown that the
grandparents in many cases are helping their offspring who are struggling to
get onto the property ladder and helping financially with their children/
grandchildren’s education. So the biggest recipients maybe the
children/grandchildren, who could also indirectly boosts further education and
housing.
But not
everyone is going to be a winner. Potential losers could be annuity companies,
as pension overhaul would mean that they no longer have a monopoly market. The
surplus profits that annuity companies made from a captive market maybe a thing
of the past and competition may mean a better service for the consumer.
"The new rules might mean that annuity companies improve the rates they
offer. The excess profits made from captive customers will hopefully
disappear," says Tom McPhail, of Hargreaves Lansdown. Annuity companies
might also look at offering other types of financial products for pensioners
such as bonds.
The radical
changes to the pension scheme may be viewed as a brave social experiment that
may just give the economy another cylinder to fire on. However, critics
particularly from the opposition labour party have argued that the policy is
reckless. It is too early to speculate whether the critics or advocates to the pension reforms
are right. Only time will tell.
