The stand out measure announced in Chancellor George Osborne’s budget last Wednesday, 19th March, was the liberation of personal pensions. He has put people in control of their own and left them free to spend their pension-dedicated savings as they wish, upon retirement.
The truth about the long obvious scam of the annuity providers’ industry, fattened by the UK’s compulsory annuity to which pension pots had to be transferred, was made immediately obvious by the biggest truth teller of them all – the stock exchange.
The FTSE share values of many of the major pension providers took a steep drop almost immediately after the Chancellor’s announcement and continued to slide. This is the investment world’s instant recognition of the fact that the easy fat profits of yesteryear can no longer be relied upon in the cream-off annuity sector; and are likely to wither as people exercise their new found freedom of choice.
The owner of big players in the annuities sector, like Royal and Sun Alliance – Resolution, down 5%, was the biggest loser amongst the FTSE 100 brigade. A specialist annuity company,Partnership, fell 13% after losing 55% in the immediate aftermath of the budget speech.
Barclays Equity Research team anticipates that the market for annuities – which has been running at £12 billion per annum – could slump to £4 billion in eighteen months time.
Those whom it would benefit if they could frighten people into staying with annuities, predictably attempted to spread alarm.
They suggested that many people, underinformed and nervous about investment, might do less well than they might with their savings, leaving them in low interest accounts. In seeing if this defence would walk, they neglected to mention what a bad deal people got with annuities as a matter of course.
Now everyone is free to take charge of their own personal pensions, with Pensions Minister, Steve Webb, adding to the move away from the nanny state by saying that if people want to spend their pension pot on a Lamborghini sports car, why shouldn’t they? He underlined that this is a matter of personal choice and he does not see it as the business of the state to interfere. It is their own money, after all.
In Australia, where this approach to pensions has been the norm, the experience is that only one in 25 Australians now buy an annuity. 33% of their savers used their pension cash to buy a home, pay off a mortgage or improve their homes at this new stage of their lives - for example by putting in new kitchens or conservatories. 20% splashed out on a new car, and 14% spent at least some of their pension on a holiday.
In America, most take their pension money as cash rather than buying an annuity with it.
PWC’s global pensions leader, Marc Hommel, said: ‘Where people have a choice, about 70% choose to take the cash. I’m personally not overly worried about it; you can see insurers lobbying against it, but in practice, people are going to learn to be more responsible with how their handle their retirement money.’
The other major benefit of the Chancellor’s measure is that it is no longer at the discretion of annuity providers to dictate what is and is not paid to an estate, should a person die before or after they retire and can open their pension pot. Under this transfer of control to the pension pot owner, its total need not be subject to having amounts retained by the provider of a compulsory annuity on a range of pretexts determined by particular schemes.
This has been a financial sector overripe for reform for a very long time. There is a real sense of freedom and individual empowerment in the air following the Chancellor’s surprise move. Little could be more welcome in this confident political redirection. At once people have been given the control they need over their own pension savings and have been freed from the bonds of the big annuity providers and the dictats of the nanny state.
This liberalisation comes into effect from April 2015.
