The world has just turned upside down

As far as rabbits went, this was a whopper. A soft long-eared carrot-munching cotton-tailed whopper.

Budget 2014 – and the announcement people can just take their money from their pension without securing any type of income and pay marginal income tax - has just turned the pensions world upside down.

For so long, the Treasury’s mantra – whenever it was approached with an idea of increasing flexibility in the retirement income world – has been “not if it depletes people’s pension funds and increases the chance of people having to rely on the State in later life”. This whole ethos now appears to have been thrown out the window.

It’s early days yet. The dust is still settling and it’s difficult to make sense of how the retirement income world will evolve following this announcement.

Certainly the current model, to some extent, was broken. Not enough people were shopping around, nor taking advice, and instead were carolled into buying an expensive and inappropriate product. Especially if they were in poor health and just rolled over into the ceding provider’s annuity.

What we now have is the ultimate flexibility. Manufacturers have free rein to design the right suite of products for their customers. That doesn’t mean annuities are consigned to the dustbin; these new products could include an annuity from the word go, or the ability to flip over into an annuity in later years.

No doubt some people will blow their entire pension pot within a few years of getting their hands on it. But the vast majority won’t. They realise it has to last them a lifetime. So, the biggest risk may be ‘reckless conservatism’. Some people can’t stand the idea their capital might fall so put it all in the bank. But after ten years of steady withdrawals and no growth, they may just find they run out of funds.

So, where our major challenge lies is making sure everyone – and I mean everyone – gets access to the right guidance to help them make the best retirement decisions.  (Actually, what I really want is everyone to get face-to-face advice, but I just can’t see how we can achieve that.) However, we are starting from a position where the market has failed because too few people could be bothered getting any help or advice, or making an active decision.

This brave new world is going to be exciting. Full flexibility should increase the desire to save and give people a tangible reason to be interested in their saving, like it has in Australia. Manufacturers can now develop and enhance products to meet peoples’ needs.

It’s a fantastic opportunity. But the guidance and advice piece of the jigsaw needs to be firmly in place to make it work.

Another nudge needed

Big day tomorrow. Budget Day is usually when pension geeks cower behind the sofa ready for some new tax onslaught on pensions. But, instead, this year we are hearing encouraging noises that the Treasury might increase the trivial commutation limit up to a (quite honestly) startling £15,000. That would help thousands of people avoid having to buy an expensive and tiny annuity.

In other news, Friends Life reported they had staged 274 schemes for automatic enrolment. But it also reports a ‘significant’ number of employers are only paying 1% employer contribution.

Automatic enrolment is being heralded as a roaring success. Already more than two million new AE pension scheme holders have started saving for retirement. And the 9% opt out rate is eye-wateringly good. But there are challenges ahead – with the so-called ‘twin peaks’ of employers enrolling this summer, and talk of provider capacity crunches.

But I wonder what percentage of employers are only paying the bare minimum in contributions. I haven’t seen any stats on this from the DWP or the tPR. But I’m willing to bet it’s a high percentage. Automatic enrolment is great as a ‘get-them-starting-saving’ vehicle, but we all know that size matters. And the more people save, the better their retirement. Increasing contributions is so much more important in the big scheme, than, say, fiddling around with charges.

So, wouldn’t it be great if the Treasury came up with some money in this year’s Budget to encourage employers to pay more than the minimum 1% into their pensions? Some sort of tax break to reward good employers.

Great. But, I suspect, very unlikely.