Lord Hutton, is an advisor for consultancy Redington, and co-author of the “Age of Responsibility” report.
Working alongside Robert Gardner, co-CEO of Redington, Lord Hutton identified a number of key factors contributing to the problem faced by savers, politicians and the financial industry.
The former Secretary of State for the Department of Work & Pensions, has vast experience in asking tough questions of the pensions industry. In 2011 he was asked to spearhead the independent Public Service Pensions Commission by the coalition government.
Pre-election Budgets are usually stuffed full of populist gimmicks and have often more to do with politics rather than economics or sound finance.
Budget 2015 was in this sense rather an outlier. With the benefit of hindsight we can probably see last year’s Budget as the much more political one – especially the landmark announcement about providing savers in DC schemes with new freedoms and choices over what to do with their pension pots.
I like the Chancellor’s emphasis on saving”
In this context, the announcements in this year’s Budget on saving have continued a theme rather than set a new direction – more consolidation rather than revolution. Nonetheless, there were still some meaty morsels both for those starting out on their savings journey as well as those who have reached the later stages of it.
I want to begin on a positive note. First of all, I like the Chancellor’s emphasis on saving. We have not had enough of this in recent years and we will need more of it in the future if we are to rise to the challenge of demographic change and the extra years we are all likely to enjoy.
His announcements on new flexible ISA’s which allow savers to continue to enjoy tax exempt saving even if they withdraw some of their ISA pot (providing they re-pay in the same tax year) and the new help to buy ISA look like sensible measures.
Both measures will help to encourage saving – particularly the later – by providing a strong reason to start saving. This should be the benchmark by which we judge any new policy. So the Chancellor should be congratulated for these new initiatives.
The announcement that from next year, people who have purchased an annuity will be free to sell the resulting income stream is a policy very much from the same stable as last year’s announcement on annuitisation.
There are however a different set of considerations to bear in mind here. First, there is little consensus over whether this is the right long term policy. There are real risks that people will exercise these new freedoms and find that their money runs out sooner than they think. This is precisely what happened in Australia.
Second, there will be practical difficulties in implementing this new policy and it is very likely that expectations will not be realised in quite the way the rhetoric surrounding this announcement has suggested.
Let’s not throw the baby out with the bathwater”
It is right that this time there will be full consultation with the industry on how this policy might best be implemented. This will hopefully avoid some of the problems we are experiencing as we approach April 6 – Freedom Day as some have called it. But disentangling annuities will require advice and not just guidance. There is a lot of detailed work to do.
Third, I hope it is not too late start to place a little more emphasis on the importance of securing a reliable income in retirement.
The fundamental problem policy makers need to address is the simple fact that we are not saving enough for our retirement. This is the issue that the next Parliament must set itself to address. Annuities will play a central role in helping pensioners manage their income needs. Let’s not throw the baby out with the bathwater.
Lord Hutton, is an advisor for consultancy Redington