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Malcolm McLean: We must learn to live with the freedoms

Any neutral observer watching the recent Work and Pensions Select Committee’s inquiry on pension freedoms could be forgiven for feeling more than a little confused.

According to the various witnesses who attended, it was possible to conclude the freedoms were either a long overdue and much needed reform or, at the other extreme, an unmitigated disaster with the potential for another major misselling scandal in the making.

There were concerns about individuals both spending their money at a rate of knots that would leave them impoverished in old age or being “recklessly conservative”, selling themselves short in their day-to-day living expenses.

There were familiar debates about the role of advice and guidance in the process and whether a boost in take-up of either or both could be achieved by various means, including the use of free advice vouchers or even the use of compulsion.

Nest even went as far as to say that advice and guidance alone would not meet the needs of millions of savers approaching and entering retirement, and strong default decumulation options were needed on top.

On the plus side, an escape route from the tyranny of annuitisation was welcome and popular with the public.

Such evidence that was available suggested the initial “dash for cash” had abated and that, despite some reservations from the FCA about advice standards, most savers were acting responsibly and appeared to be managing their money well.

The right for consumers to decide for themselves how to spend their own money was a fundamental principle underpinning the policy and had to be maintained, notwithstanding that in many cases at least some proportion of the money was contributed by employers and government tax relief.

Are the pension freedoms faltering?

I have to say, ever since the freedoms were announced largely out of the blue, I have tended to blow hot and cold about them.

My first reaction was largely favourable, mainly because of the very poor value being offered by annuities and the need to free up the system and find ways of offering savers much better returns.

Later on, I began to worry about the long-term effects of such a radical policy switch and the potentially very serious conse-quences of people being wrongly encouraged to leave the security of a high quality defined benefit scheme, of over-paying tax or of being scammed.

I am now of the opinion that, whereas these are significant problems that have yet to be properly and fully addressed, there is almost certainly no going back on the policy as a whole.

Pension freedoms are here to stay, and whereas select committees and others may want to tinker with the detail, we, and more importantly, future generations will have to learn to live with them – good or bad, warts and all.

Malcolm McLean is senior consultant at Barnett Waddingham

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Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. Christopher Petrie 30th November 2017 at 5:58 pm

    If a client came to you with 300k in savings, requiring an income from that, would you recommend he bought a Purchased Life Annuity?

    Of course not.

    So if a client came to you with 300k in a pension wrapper, would you recommend a pension annuity? Logically, of course not. And you get some tax relief on the Capital Content element on a PLA!

    So, apart from historical tradition, who would recommend a pension annuity now, and why?

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