With all the leaking that goes on these days it is strange to recall a time when a budget came as a genuine shock. But George Osborne’s in 2014 was one such occasion.
The Conservative chancellor announced, to a stunned House of Commons, that people would no longer be forced to buy an annuity with their pension pot. Instead they would be free to take it all in one go, take it in chunks or buy an annuity if they wanted to. Thus “pension freedoms” were born.
As the pensions minister at the time I worked on the announcement with the chancellor. I was pressed in a BBC TV interview the day after the budget about the risk that people would be reckless and blow their pensions in one go. I replied that if people “wanted to buy a Lamborghini” with their pension that was fine by me. It turned out that this would be the only thing I said that anyone would remember. And, despite a report by the government’s Pensions Commission this week that is decidedly hostile to pension freedoms, I stand by that remark. Looking at what has happened in the decade or so since the policy was implemented, what is striking is how responsible people have been.
It is true that in the early years of the policy slightly more than half of all pension pots were cashed out in full. But it has always been the smallest pots — the ones that aren’t really going to support someone through the decades of retirement — that are most likely to be cashed out. As pension pots have started to grow since the advent of automatic enrolment, the rate of people taking all their cash out has started to fall.
And there has always been a brake on the Lamborghini — the tax system. If you do decide to blow a large pension pot in one go, you are taxed on it in full that year. This can easily lead you into higher tax brackets and is generally a bad idea. Spreading your withdrawals over many years is likely to reduce your tax bill.
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The Pensions Commission report is negative about pension freedoms. It points out that some people use their freedom to access their pensions as soon as they can — age 55 at the moment, rising to 57 from 2028 — and may ease off on the amount of paid work that they do. But what’s wrong with that?
If people have worked hard and saved hard and built up enough pension to support a move to a shorter working week, isn’t it up to them? Getting people to sacrifice now so that they can build up an income for later through a pension can be a hard sell. The last thing we should be doing is disapproving when people enjoy the fruits of their self-control.
The same goes for tax-free lump sums. The commission is concerned that most people take out their full 25 per cent tax-free cash when they have the chance. And it’s true that money taken out in your fifties and sixties won’t be there in your later retirement. But the tax-free lump sum is one of the few features of a complicated system that most people have heard of and which makes pension saving especially attractive. Let us not make changes that could put people off.
My research into the spending patterns of more than 100,000 pensioners shows that homeowners have a strong preference for “frontloading” their spending. Not surprisingly, they want to spend money on holidays and eating out earlier in their retirement, when they are most able to enjoy it. Pension freedoms have allowed them to do just that.
People who reach retirement with a decent pension pot are the opposite of feckless. They are the ones who were willing to sacrifice consumption — often before the days of automatic enrolment — to build up a nest egg for later. Freeing them up to use those hard-earned savings in the way that is right for them is a policy of which I remain proud. Let us hope that a “government knows best” mindset does not undo this good work.
Steve Webb is a partner at the consultancy LCP and was the pensions minister from 2010-15