The Budget changes to pension withdrawals have been widely welcomed but there are several reasons to treat the proposals with some scepticism.
Take the removal of restrictions on withdrawal limits. The observant (not mainstream media) will note that the expected revenue generated from the changes is £3bn over the next five years. We now see a major restriction in pension tax reliefs (£40,000 now versus £215,000 in 2006) and a rise in taxable income allowed for withdrawal.
Imprudent savers will pull funds out of pensions, investing in, for example, buy-to-let properties. This has a second benefit to the Treasury because on top of the income tax on pension withdrawals, revenue will also be collected from these properties in the form of stamp duty, income tax on rent, capital gains tax on profits, VAT on agents’ and other fees and, of course, IHT on death, where most pensions would have been exempt.
Even the short-term withdrawal increase to 150 per cent GAD is foolhardy. A 65-year-old male should not expect to withdraw more than 9 per cent a year from their fund without a major erosion of capital.
I understand some individuals may have extreme needs, or even other assets to rely on, but many will make unwise levels of withdrawals. When this inevitably fails, they will seek someone to blame.
Pensions minister Steve Webb may claim not to be paternal but I believe the FCA and FOS are and our PI and FSCS fees tend to subsidise the feckless.
My experience is that individuals underestimate their continued good health and longevity. I often tell clients in their sixties that they may need to rein in their expenses in their late seventies or early eighties. They think they will be over the hill by this point but I am sure we all know people in this category who are anything but.
The ONS suggests that a 65-year-old has a dozen years in “good” or “very good” health and that a 65-year-old couple have a 50 per cent chance of being around a quarter of a century later.
Product innovation will come – an idea that fills me with dread. It seems to me that most innovation in financial products serves the innovator far more than the end-client. Hybrid products often have the disadvantages of both annuity and drawdown but few of the advantages. Guaranteed drawdown is often costly and to guarantee an investment-linked annuity will not fall, you must take a big discount from the level variety.
I foresee banks re-entering the consumer advice market. Sipps, now regulated, are still fairly simple to “manufacture” and can be filled with cash and structured products. These investments are what banks like to sell and consumers fleeing the perceived inflexibility of drawdown may be suckered into the lure of “guarantees” with greater accessibility. Which high-street bank will be first to launch an Isa and Sipp wrapper with a debit card attached?
I risk sounding unduly cynical. These changes will be great for advised clients who can accrue funds avoiding higher rates of tax, and often NI, and ultimately decumulate with no more than basic rate. But the advised are the minority and the Treasury, high-street banks and ex-PPI ambulance chasers may be rubbing their hands at the opportunity presented by the Chancellor.