In the last Budget George Osborne announced the removal of certain restrictions on how people can spend their “pension pot”. If you are not familiar with the term, this means the money that is built up by payments, by individuals and their employers, into an individual pension fund. This is usually invested by the fund manager in an attempt to make more money for the individual. On retirement, the theory goes, the individual uses the fund to buy an annuity, a product which pays out a fixed sum every year until the person dies, and that is their pension.
In practice, it doesn’t really work like that. A combination of poor equity performance, low interest rates, high fund manager fees and decreasing mortality (ie we are all living a lot longer) means that most people can only afford an annuity which pays out a few thousand a year. Fancy living on £4,000 a year? No, me neither.
The kicker is that when you retire you have limited options. You can take 25% of your pension fund tax free but you MUST leave the remainder in the fund or use it to buy an annuity or you get kicked in the b*lls by the tax man. If you retire just after annuity rates plummet leaving you with £4,000 a year when you were expecting eight, that’s just tough tits. You can leave the money in the fund and live on nothing for a few years in the hope that annuity rates will improve, or you can take the £4,000 and be grateful.
Fortunately Mr Gideon Osborne, friend of the poor and defender of the hardworking family, is riding to the rescue. That last bit was irony by the way, but the next bit isn’t. In future you will be able to take all of your fund as a lump sum if you want; you will still pay some tax on amounts in excess of 25%, but it won’t be anything like the current 55% tax rate. I guess in Gideon’s fevered mind this gives people leeway to invest their money elsewhere, which will put pressure on the annuity providers to raise their game. Others are worried that pensioners with pots of money to spend will fritter their pension funds away on time-shares and cruises. Personally I think they are more likely to fritter it away on luxuries like food and heating, but either way there is one big problem, which is that we are all living longer, and therefore we need either to have a bigger pension fund, which most people don’t, work a lot longer, which most people can’t or don’t want to, or accept that if we want an income for life from our pension funds, that income is likely to be very low.
If you have a pension pot of say £60,000 after tax and you are planning to invest it and draw down on it each year to live (ie take money out,) you will be lucky to get say a six percent return. If you take this as the amount you take out each year, you’ll have about £3,600 a year to live on. It ain’t exactly the high life, and in any event, the average UK pension pot is half that. The fear is that the grim reality of facing a penurious retirement will drive pensioners into the arms of snake-oil salesmen who will sell them timeshares in Malaga with promises that they can rent them out for income and sell them on at a profit. The answer which somebody has come up with is to make it compulsory for financial advisers to show people graphs illustrating how long they are likely to live. These will be based on the actuarial tables used by pension providers which calculate how long each group of people born at a particular time will live, based on things like occupation, lifestyle, job, geographical area etc.
Whilst this is on the face of it a nice idea, it has some major flaws. Firstly, most people with a pension pot of £30,000 probably don’t have a financial adviser. Secondly, if Gideon himself dressed up in a black robe with a scythe and danced in front of people waving a large neon sign saying “30 more years” it still wouldn’t change the fact that there just isn’t enough money. Faced with the grisly reality most people are likely to beckon over the timeshare salesman, sign on the dotted line and move to Spain to start drinking themselves to death
But fear not! Remember I called Gideon the saviour of the poor? I was not joking. The problem, you will recall, are those pesky mortality figures. If we all died five years after retirement there would be plenty of money to go round. So kind Gideon and his friends Jezza and Dave are doing their best to achieve that by dismantling the NHS, plugging alcohol and ensuring that those in minimum wage jobs can barely afford to eat, never mind eat healthily. In a few years anyone who didn’t go to Eton will have a post-retirement life expectancy of about five years, meaning we’ll be able to afford the timeshare and live plushly on £10,000 a year before obligingly croaking just as the money runs out. Job done!