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\u2019s in 2014 was one such occasion. <\/p>\n
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 \u201cpension freedoms\u201d were born. <\/p>\n
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 \u201cwanted to buy a Lamborghini\u201d 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\u2019s 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.<\/p>\n
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 \u2014 the ones that aren\u2019t really going to support someone through the decades of retirement \u2014 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.<\/p>\n
And there has always been a brake on the Lamborghini \u2014 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.<\/p>\n
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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 \u2014 age 55 at the moment, rising to 57 from 2028 \u2014 and may ease off on the amount of paid work that they do. But what\u2019s wrong with that?<\/p>\n
If people have worked hard and saved hard and built up enough pension to support a move to a shorter working week, isn\u2019t 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.<\/p>\n