6 April is ‘Pensions Freedom Day’.
There have been many, many such days in the past. Remember ‘A-day’? That one came way back in April 2006. The idea was to make pensions simpler. But in typical Gordon Brown fashion, for every simplification a little complication was thrown into the mix.
However, it’s worth suspending your cynicism. Because if you’re an investor, these changes are very good news.
The biggest question is – will they stick?
In this case, politicians can give themselves a pat on the back
I remember seeing the Liberal Democrat pensions minister, Steve Webb, at a dinner with a group of journalists not that long after the coalition came to power.
My default view of politicians is probably quite similar to yours – it ranges from fairly cynical to openly contemptuous. And pensions – well, politicians don’t have a good record on that front.
But Webb seemed to be pretty energetic. He seemed to understand a lot of the basic problems – poor value, consumers being ripped off, and over-complexity. And he looked like a guy who actually wanted to do the job, rather than use it as a stepping stone to greater things.
Now, not being privy to the inner workings of our government, I don’t know exactly how much credit Webb can claim for the ‘pensions revolution’. But I think anyone involved in the pensions reforms made by the coalition can give themselves a pat on the back.
They’ve certainly shaken things up. But more importantly, they’ve actually improved things for the average voter, rather than treating pensions entirely as a sort of piggy bank for the government to dip into when it’s feeling a bit short of cash.
We’ve written a lot about the changes in MoneyWeek magazine and on the website. But put simply, pensions freedom day means that no one has to trade in their pension pot for a lifetime income (annuity). And it means you can access your pension pot in a way that suits you.
You can take an income from it, you can pull out the lot (which would be stupid for most people, because you’d pay a ridiculous amount of tax on it), and you still get the 25% tax-free lump sum – which you can also take in a way that suits you.
Will you soon be able to trade in your annuity for cash?
Of course, this doesn’t necessarily help people who have already retired and bought an annuity. So now, off the back of the popularity of the latest reforms, the government is apparently looking at enabling annuitants to sell their annuities, in exchange for a lump sum.
It’s one of the announcements we’ll be watching out closely for in Wednesday’s Budget.
Now, this is a tricky issue, no doubt about it. Annuities were ripe for mis-selling in the first place. Lots of people didn’t take advantage of their option to shop around because they didn’t know enough to do anything about it, and as a result they didn’t get the best lifetime income available for them.
So how would you safeguard the process of selling your annuity back? What counts as a decent rate? After all, one side or the other is going to get the rough end of the deal.
At the same time, it could be very useful for anyone who wants to take advantage of the new pension flexibilities, or who’s regretting the particular annuity they bought. It might also be an incentive for people to get to grips with whether they got good value or not when they first bought their annuity.
The biggest threat to the pensions revolution: political risk
Of course, there’s no guarantee that this will be announced in the Budget – George Osborne has proved rather better at managing leaks than his predecessors. And even if it is, there’s no guarantee the changes will stick.
Because the other tricky thing, of course, is the general election. Labour has already laid out plans to cut tax relief on pensions. That’s not necessarily a bad thing – the reliefs are expensive, and there could be more sensible ways to deploy the money. But Labour’s plans are of the incoherent ‘bash the rich’ variety, rather than ‘there must be a more efficient way to do this’ variety.
They are also not ideologically disposed to endowing people with choice and responsibility. In fact, I reckon the annuities industry should be praying for a Labour/SNP coalition – that’s a sector to buy if we wake up to Ed Miliband cracking open the champagne on 8 May. (I’m only slightly joking.)
So despite these great changes, the fundamental flaw with pensions remains. They’re still at the whim of cash-strapped governments. It’s one good reason – particularly for younger people – to make sure at least some of your long-term savings are in an Individual Savings Account (Isa). They can be interfered with too, but they’re not quite as obvious a political target.
In any case, whatever happens, we’ll be covering it in detail in forthcoming issues of MoneyWeek magazine. If you’re not already a subscriber, now’s the time to get on board. If you want to take advantage of your new freedoms, you’re going to need to stay informed – not just today or in the next few weeks, but right up until you retire, and beyond. So get into a good habit now – get your first four issues free here.