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Pension freedom versus nudge theory


The pensions revolution announced in the Budget seemed to draw a clear political dividing line between those who trust people and those who don’t. Put in loftier terms: those who believe in freedom and those who believe in paternalism.

But the line is not perhaps as stark as it might seem. 

Yes, those over 55 will be allowed to take their whole pension pot as cash, with the 25 per cent lump sum continuing to be tax-free and the remainder taxed at the saver’s marginal rate. They will be able to buy an annuity, bonds, a house or even a Lamborghini. The Government relies on the fact people will make the right choice.

But at the other end of the pensions process however, the freedom approach has been left wanting. Too few people have saved for retirement off their own backs. Enter nudge theory and the plan put together with cross party support under the last Labour Government to auto-enrol people into workplace pensions unless they opt out. 

As Work and Pensions selct committee chair Dame Anne Begg pointed out to pensions minister Steve Webb at a hearing yesterday, these are two very different approaches. One is based on trusting people to do the right thing, while the other is based on the idea that people cannot be trusted to do the right thing unless they are nudged towards it.

It may well be that your average person in their 20s does not know the difference between an annuity and their auntie, and so need a little nudge towards putting something away for when they get old – and that is no bad thing.

But it is far from certain that over 55s are any wiser, or any more able to navigate the Kafkaesque world of pensions and investments, with or without 15 minutes of guidance.

It certainly is the case that they are far more likely to vote, so giving them the “freedom” to do with their savings as they please – as long as they are happy to pay the tax bill – is an electorally shrewd move. But this commitment to freedom is not as all encompassing as politicians would have you believe.

Steve Tolley is reporter at Money Marketing 


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Andy Robertson-Fox 1st May 2014 at 8:05 pm

    “But this commitment to freedom is not as all encompassing as politicians would have you believe.”
    The cynic in me says “Ever thus”
    When I visited the offices of the Ministry of Pensions and National Insurance all those years ago and applied for my NI number I was advised that I would get a pension when I was 65 and, if married and I predeceased my wife she would get a pension based on my contributions. I believed them.
    When I enquired some years later about the payment of my pension if I retired abroad International Pensions confirmed that it was payable world wide (no mention of any residential conditiions or restrictions) and my foreign spouse would still be eligible if she was widowed.
    On reaching 65 came notification of my entitlement and with it that my pension would be frozen at that level because of the country in which we noe lived; no index linking ever.
    More recently the Pensions Minister has announced that a pension based on a deceased spouse’s contributions will cease to be payable…only a pension based on their own contribution record.
    I am by no means alone in the frozen pension discrimination – there are over half a million who are being victimised – and there are many, both in the UK and overseas whose spouse will not be eligible for a “widows pension” because the government in the shape of Mr. Steve Webb has torpedoed their plans and too late to set up alternative arrangements.
    Successive governments have advocated planning and budgetting for one’s retirement but with goal posts so frequently on the move – and inadequately promulgated by the DWP, as usual, -is it any wonder that this latest venture into wonderland is, as Steve Tolley says, “not as all encompassing as politicians would have us believe.”
    How soon will the rules be changed? Be warned – not for nothing is there a saying that if something looks too good to be true then it probably is.

  2. George Morley 4th May 2014 at 6:05 pm

    Andy Robertson-Fox commented about this line – “But this commitment to freedom is not as all encompassing as politicians would have you believe”
    How true and had he not already commented about it I certainly would have done.
    It is over 60 years that successive governments have been cheating pensioners by denying them any indexing should they decide to retire in some countries abroad. Not to any logical pattern but then why is there a need for any pattern ? A pensioner who has paid the necessary contributions is qualified to receive the uprating and rightly so. This is constantly being voiced by Steve Webb when in reality he condones this theft, because that is what it is. The denial of indexing means an uncertain future with poverty on the horizon just because they wish to be where they choose in retirement and not where the government choose to pay the indexing. Why should anyone be placed in such a position ? Why should there be any restriction on a persons future place of residence ? Naturally there has been no justification given when asked and this type of underhand business has no place in a modern society in the21st century.

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