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Nick Bamford: Pension freedoms have given clients control

When the pension freedoms were first introduced, I could not help thinking it was a clever device to accelerate the income tax take. Instead of waiting many years to take income tax against modest annuity income payments, the government could grab a larger handful straightaway.

After a couple of years of reflection, I still think this is the case but I recognise the changes have important advantages too.

I suspect many people have changed their view as to what a pension pot is and does. For some, it is no longer about generating a flow of retirement income but more about choosing how and when to use the money that has been accumulated, as little or as much as they want. Freedom and choice has changed the face of pensions.

There are two questions we need to ask: whose money is it and do we trust them with that money?

The chancellor at the time said he did trust people with their pension pots but that turned out to be only partial trust, as he then legislated that anyone with defined benefits or guaranteed pensions valued at over £30,000 would be compelled to take advice.

We should emphasise here that compulsory advice was not something thought up by the financial services sector but driven by politicians.

As to whose money it is, well, it certainly does not belong to me or to the financial services sector. It clearly belongs to the pension pot owner.

We hear stories about people squandering their hard-earned pension money, which was bound to be one of the consequences of the radical change.

A Government select committee is about to investigate the changes and has accumulated a number of horror stories about the things people have done with their pension fund. The worst reported case seems to be someone who gambled away £120,000.

I cannot say I have seen many examples of money being squandered myself but I have seen lots of examples of what I would consider positive spending.

Paying off debt has been quite popular, with lump sums being used to get rid of outstanding mortgages and other loans. I have seen it used to pay education costs for children and grandchildren. Investment in businesses has also cropped up quite frequently.

Some withdrawals have been used to pay for special life events such as travel. One of my clients is using some of his pension fund to visit family in Australia. He recently lost a close family member, which has influenced his decision. And who can blame him?

Of course, the adviser will always consider other sources of money for such things but, where a pension pot is a significant asset, you can see why it might be used this way.

There will always be bad examples but I am pretty convinced the good examples will outweigh them. Sure, taking all of your pension pot and wasting it is not likely to represent good financial planning. But then it is not my money, is it?

Nick Bamford is executive director at Informed Choice

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. Well said Nick! There will always be an irresponsible few but to take those freedoms away from the majority merely to protect the few would be a gross travesty. Some politicians will always be tempted to create a “nanny state” but I am all for personal freedom and liberty to be as foolish as I choose with my own money.

  2. Couldn’t agree more.

  3. Two BIG disadvantages for anyone cashing in their pension fund/s all in one go are that:-

    1. A large proportion of it/them will probably get hit for tax at twice the rate that would apply were they to draw it as a regular income and

    2. Once they find themselves struggling to make ends meet from one month to the next, they may well regret having spent it now.

    Unless this week’s budget cuts or removes altogether the 25% TFC option, that should be enough for most people, surely?

  4. A tax take ..yes

    Imagine the tax take if they reversed the legislation

  5. Personally I think the phrase ‘Whose money is it’ is a little disingenuous. Tax relief was given at source (CRAP – Contributions Relief At Payment)and the quid pro quo was that it is supposed to provide an income for life. The so called freedoms just permit the person to live in penury in later life or fall back on the State. Yes I know that a pension in payment attracts tax but for many who are now accessing funds – whether an annuity or drawdown they benefited from tax relief at their highest marginal rates for contributions far in excess than those permitted today. With judicious planning they could have received tax relief of 40% (or more) and are now in the 20% bracket.

    Let’s see how sanguine advisers and clients will be when we have the next major correction – while annuity rates are now actually improving. For those in good health who are daft enough to draw benefits at under 65 they are going to be the ones the rest of us will subsidise in years to come.

    • Thanks Harry your unique and refreshing view on things always makes for a good read.

      I’m pretty confident most people are bright enough to know and understand the risks that they are taking and don’t need nanny state or nanny advisers to tell them how to live their lives

      • Nick, I’m guessing you think this based on the people you deal with as an adviser. However, these people are probably the more savvy (at least enough to seek out advice), financially endowed and in the minority of the population. ‘Most people’, by definition, will be your average consumer with an average pension pot, i.e. low financial knowledge and not a great deal in the pot respectively.

        Your comment, “We should emphasise here that compulsory advice was not something thought up by the financial services sector but driven by politicians.”, as well as being true, is quite poignant. Why did they do this? Simply as insurance. If and when things go wrong (and the FCA have already set the scene with recent activity and comments), the blame will rest with advisers. Politicians have learnt from the last pension debacle and don’t want the risk of problems being laid at their door. Classic hospital pass.

      • Nick

        Thank you for the compliment (I think?) However clients come to us for advice – is that nannying? Aren’t we expected to guide them in the right direction?

        The Government doesn’t really nanny at all they just want to pluck the goose with the least amount of hissing.

  6. The problem is that if they blow the lot, then in retirement they fall back on the tax payer.

    As for the concern about mandatory advice, if customers can do their own financial planning, why do IFA’s need qualifications.

    • Those who’ve cashed in their pension funds, blown the proceeds and who, as a result, find themselves struggling to make ends meet cannot (successfully) claim additional (means-tested) state benefits to replace the income that those funds could have purchased. The same applies to unvested pension funds which are supposed to be (but, anecdotally, often aren’t) declared when claiming means-tested benefits. I believe that GAD annuity rates (or similar) are applied.

    • Many of the people we don’t deal with have a very simple choice extracting their small pot tax free (over a short number of tax years) or a tiny regular income over a long period that will hardly be life changing/life enhancing.

      Many don’t need or can’t afford (or both) highly qualified advisers

      And note Julian’s point re falling back on the State

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