Don’t let the politicians mess up your pension
It can often feel like politicians are only there to get in our way. The coming General Election brings with it a host of sizeable risks – whether the threat of damaging new interventions in markets, the prospect of months of confidence-sapping uncertainty over the stability of the next government, or the possibility that a strong showing by the SNP could lead to yet another referendum on Scottish independence.
So it’s easy to forget that some political change is positive. And that is certainly true of the current government’s pensions reforms, which came into effect earlier this month.
The doom-mongers argued that ending the compulsory purchase of annuities – and extending pension freedoms beyond the richest – would expose the very worst in human nature: at retirement, people would simply withdraw all their pension in cash, spend it on a few nice holidays, and leave nothing aside for their long-term support.
It’s early days yet, but aside from the fact that some may be better off using their pension to pay off debts – especially if their pot is small – all the evidence so far suggests that investors will be the opposite of irresponsible. A recent survey by PwC, for example, found that only 27 per cent of adults aged 50 to 75 intend to spend some of their pension pot, and 22 per cent of those respondents wished to carry out home improvements or pay off unsecured debt and mortgages. A full 67 per cent said they were factoring the need for a long-term income into their retirement decisions.
Of the 3,000 calls it took from its customers in the days after the reforms came into force, meanwhile, Standard Life said the majority had decided to take the time to consider their retirement options, rather than simply act immediately.
There is legitimate criticism that the industry hasn’t moved fast enough to allow customers full access to their money. The inadequacy of the government-mandated guidance service will also need to be addressed – and investors would be wise to seek proper financial advice before making major decisions about their pension. Ultimately, however, the government was right to trust people with their own money – acknowledging that the paternalistic idea that someone else knows better is both inappropriate for an age of greater individualism and also fails to deliver optimal results (think of all the pensioners languishing on poor value annuities).
But there is a new threat to investors. All three major political parties are proposing to raid the pensions tax reliefs available to higher earners in order to fund other giveaways. And as I discuss on pages 42 to 45, the planned reduction in the lifetime allowance for pensions will cause untold difficulties for savers.
This makes it all the more important that you are informed in how you manage your money. I hope this second edition of Morning Wire Money will help.