Like many others I sit and look at the pile of paper I have about my pension scheme and a fog descends. I was considering sorting it out and buying an annuity last year, but put it off because the process involved using up more brain cells than I felt I could afford.
It turns out for once that laziness and procrastination has a dividend. The Government’s Budget announcement seems to offer me better alternatives than a miserable annuity and opens up the possibility of taking most or all of the whole pension pot and doing something else with it.
So I am in the camp that says that more flexibility is a good thing and I will not weep for the annuities industry losing some of their share value. However I am no better than anyone else at predicting how long I will live and for how long I will need an income. Having the money in the hand could well prove a temptation, even putting to one side LibDem Minister Steve Webb’s ludicrous comment about buying Lamborghinis. Labour has been attacked for making points that are blatantly obvious – if people spend their money early, they may be left with insufficient income and be more dependent on the State later. David Cameron mocks such genuine concerns as being ‘patronising’ but it just shows how out of touch he is with the really difficult decisions that ordinary people have to make.
In his blog for the Financial Times, John McDermott raised an interesting point about what the Coalition is up to. Alongside general concerns that the policy will lead to short-termism and that there may be scope for new charlatans to operate in the market, he wonders how much this liberalisation of pensions has to do with paying for social care.
Sometimes two otherwise benign policies can collide in an unfortunate way, but with this Government more malevolent motivations should always be expected. They want to cap the costs of some aspects of care to avoid people having to sell their homes to pay for it. But now they can sell their pension entitlement instead. By foregoing a regular annuity income they may have capital sitting in the bank or in investments – waiting to be assessed. Even with the cap, care is expensive, and some costs, such as general living costs in a care home, are not included within the cap. ‘Goodbye annuities, hello social care accounts’ says John.
Julia Unwin of the Joseph Rowntree Foundation was one of several charity leaders to also raise concerns about a pensions reform that could lead to people incurring social care costs which they would otherwise have avoided. As I understand it, someone with assets of less than £118,000, or £27,000 excluding their home, will have all their care costs paid. A pension being received in the form of an income from an annuity would be disregarded but a lump sum taken out of their pension pot could take them over the limit.
This flexibility over pensions does not come free. Any amount above 25% being taken out of your pension pot would be subject to tax. George Osborne has spotted that this could contribute painlessly to reducing the deficit in years ahead. Is this a classic case of short term gain but long term pain?