Over the next few months I will be officially ‘retiring’. Don’t get your hopes up, dear reader: what I will actually be doing is consolidating the many different personal pensions I have paid into over the past few decades.
Thereafter, the plan is to take the 25 per cent tax-free lump sum and use it towards building an extension to our property. The rest will be invested via a drawdown arrangement until I am ready to take a proper pension income, hopefully many years from now.
The lump sum will also still be ‘invested’, in more ways than one. Talking to architects and local estate agents has helped us realise that, given our location, a larger property on our plot can command a stratospherically better price should we ever decide to downsize.
Which means the house fire we suffered late last year has given us a much-needed opportunity to improve our home beyond the basic reinstatement paid for by our insurer.
The challenge was always where to find the money for this work.
In addition to various pensions, both occupational and private, I have also saved into Isas and their Pep predecessors over the years. We always intended that about one third of our overall retirement income should come from Isas.
Initially, it seemed easier to just cash in one or two of the anomalous Isas, like the former £3,000 single company Pep whose value, as of last Friday’s close, has risen five-fold (with reinvested dividends) since April 1999. Or a far less successful FTSE All-Share Isa/Pep taken out in 1998.
But the continuing income potential of Isas, in many respects, means that while we consolidate and review all our investments my personal pensions will now become less important as sources of long-term retirement income.
To some extent, George Osborne’s Budget speech the other day, while introducing few new factors to our decision, did at least confirm its trajectory.
His announcement that from April 2015 anyone over the age of 55 may take their entire pension pot as cash, subject to tax at the marginal rate, while also increasing the overall trivial commutation limit from £18,000 to £30,000, has effectively sounded the death knell for old-style annuities.
What is striking about Osborne’s announcement is that while Steve Webb spent the best part of the past year prattling on endlessly about reforms to the annuity market, the Chancellor chose to make them irrelevant instead.
It seems clear that, faced with a market incapable of offering a fair deal to retirees, reluctant to allow savers to access a genuine open market option – and a tardy regulator incapable of enforcing the most basic requirement for providers to treat their customers fairly – Osborne simply decided to dynamite the product itself.
Yet, as Annuity Line head of business development Billy Burrows said on the Money Marketing website last week, it does not mean annuities are dead and buried. They will continue to guarantee an income in retirement, essential for hundreds of thousands of retirees expecting to live longer than people have ever done before.
To many people, this secure income option will always be the most important consideration: the Financial Times’ Lex column pointed out that in the US it is not compulsory to buy an annuity but $220bn (more than £130bn) of them were sold in 2012.
As annuity levels increase along with rising interest rates, they will remain a more attractive option to those who prefer security of income to other uncertain alternatives.
And Billy may be right in saying that “by taking away the burden of the small pots the industry will able to focus on providing better value and more choice for those with larger pension funds”.
But I can’t help feeling that the cashing-in of pension lump sums will not split evenly between those with small and large lump sums, as he implies.
Current savers’ average pension pots were variously estimated at between £17,700 and £30,000 in newspapers last week, suggesting that many who could have commuted some or all of their available lump sums chose not to do so. If so, insurers will not feel as compelled to compete for those smaller sums.
Besides, the overall decline in numbers of those taking out annuities will affect companies’ ability to pool risk, leading to increased adverse selection and poorer-value annuities for those with no impaired life options available to them.
My biggest concern is over the absence of an advice structure whereby those who want to make an informed decision about whether they should cash in their pensions.
I heard Steve Webb on the BBC at the weekend talking about how everyone will receive free face-to-face guidance at the point of retirement, kickstarted by up to £20m of government funds.
Webb must know this sum is far too small for upwards of 400,000 retirees a year to receive a detailed analysis of their needs and the next steps they should take. For those with small lump sums, this advice could potentially cost an impossibly large chunk of their money.
Those of us able to make reasonably informed decisions will be able to work our way round the Chancellor’s annuity announcement. Unless the Government improves its help to those who will need advice, I fear George Osborne’s legacy will be more uncertainty and smaller pensions.
Nic Cicutti can be contacted at firstname.lastname@example.org