Bombshell Budget 2014: The Treasury has just ripped up the entry for ‘pensions’, formerly known as a “regular payment” made in retirement
As clichés go, beginning an article with a dictionary definition is at the top of the list. But these are unusual times. The Treasury has just ripped up the entry for ‘pensions’, formerly known as a “regular payment” made in retirement.
Under proposals outlined in this year’s Budget, pensioners will be free to do whatever they like with the money they have saved in a workplace pension scheme. They could use their pot to buy a guaranteed retirement income or blow the lot on a shiny red Lamborghini.
At the heart of this decision is a conviction that choice is a good thing. The government plans to offset the fact it has just effectively awarded a Lamborghini License to the population with compulsory advice, although it is not yet clear where that advice will come from and how it will be funded.
Stock markets change, how often will people be able to seek advice on what to do?
There are also operational difficulties: for example, what if someone decides to draw down their pension income over time? As stock markets change, how often will people be able to seek advice on what to do?
Irrespective of how those issues are resolved, the fundamental choice remains: save it or blow it. Human nature dictates that some will take the sensible route and others will speed off into the sunset in a sports car.
People act for the here and now
Damian Stancombe, Barnett Waddingham’s head of employee benefits, is concerned that the temptation to splurge will be too great. “People act for the here and now – that’s what we are as a society and have been for a long time.” Stancombe also worries that people might use their pension to pay off personal debt and end up broke by 65.
By contrast, annuity products, with the guaranteed lifelong income that they offer, start to look attractive. After all, someone who bought an annuity 15 years ago would have seen the entire financial crisis through unscathed, regular income intact.
Companies will have to drop the jargon and cut their fees to stop retirees taking their money out
However, annuities have such a terrible reputation that retirees will abandon them in droves unless the market becomes more competitive, fast. This could become a vicious circle: if annuities become a rarefied option and providers lose their economies of scale, the products on offer will become less and less competitive.
This Budget is a golden opportunity to create a retirement revolution. Product innovation will be driven by the simple need to attract retirees as enlightened consumers with newfound power over their buying decisions. Investment companies will have to drop the jargon and cut their fees to stop retirees taking their money out and buying investment properties en masse.
‘Retirement’ is fast becoming outpaced
A quieter revolution is already happening. ‘Retirement’ is fast becoming outpaced by the needs of a healthier ageing population who will taper down their working lives instead of coming to a hard stop. That’s why more flexible models like income drawdown, if they are explained straightforwardly, will be the future.
The government has ripped up the rulebook – it’s up to the industry to come up with a new generation of products for a group of end investors who will demand more innovation and flexibility than ever before.