Experts are warning Chancellor George Osborne’s pensions revolution will be “rocket fuel” to the property market as concerns are raised over pots running dry too quickly.
In the Budget, the Chancellor announced from April next year anyone who is aged 55 or over will be able to take their entire pension fund as cash.
The first 25 per cent will be tax-free but the remaining 75 per cent of the fund would be taxed at the saver’s marginal rate.
The new rules could see a boost to the buy-to-let market as many invest their pots into residential property.
Think tank Strategic Society Centre director James Lloyd believes the buy-to-let market is the most likely home for newly released pensions cash.
He says: “The Chancellor has thrown rocket fuel on an already overheated property market, and millions of young first-time buyers will suffer as a result. It is a catastrophic policy decision.”
Borrowers could also use a windfall to pay off interest-only loans at the end of their deals if they wish.
If the money is not ploughed into property then some believe it could end up sat in a bank account languishing on low returns.
Lloyd says: “What do people do with a big pile of savings in retirement? Either they splurge and rely on the state or most people go into excessive cautionary savings with a low income because they are afraid of losing it. People will have worse incomes as a result of this move, not better.
“In decades to come George Osborne will be seen as the Chancellor who destroyed pensions.”
Pensions consultant Rachel Vahey says: “There are a lot of people who will just dither and not know what to do. They will simply put it into a bank account and be unable to make a choice because they might not want to, or be able to afford, face to face advice. The risk is they keep from withdrawing the money from the bank and it will not last.”
The role of advice
Concerns around how individuals will choose to spend their money points to the need for expert advice and guidance.
Alongside his reforms, Osborne has set aside £20m scheme over two years to guarantee all member of defined contribution pensions schemes are offered face guidance at-retirement. The initiative will also be funded by an unspecified levy on pension providers and trust-based schemes.
Experts say advice is not just needed at retirement but post-retirement if someone is managing their own pot over time.
Hymans Robertson partner Chris Noon says: “Free government-backed advice at-retirement is a great thing, but for many savers they are now facing a retirement with a need for regular advice post-65.”
Financial consultant Richard Hobbs says: “This is compounded by problems from the RDR, which is a shortage of advisers for this brave new world. Although these radical reforms are very exciting, there is a key risk that there is a shortage of advisers and the initial users are likely to use their pots unwisely.”
Pensions pots withdrawn as cash will count towards any means test whereas earlier it was only annuity or drawdown income that applied.
Experts say the rules around avoiding means test thresholds will need to be tightened to avoid local authorities facing higher bills.
Lloyd says: “You can take the money as liquid savings and do anything you want with it. It is child’s play to take it beyond the means test.
“People think about the optimal arrangements of their assets to get the most from local authorities, and this practice is already rife.
“Long before they need care people think about the optimal arrangements of their assets to get the most from local authorities, it’s already rife. The Care Bill will bring in a lifetime cap on care costs which will increase this activity because more people will have an immediate incentive to come within the means test threshold.”
Symponia managing director Janet Davies says: “If someone has spent their pension money then would the local authority could say you have spent money to avoid care costs when it was meant to last. The rules need to be tightened.”
In the House of Commons this week, pensions minister Steve Webb said: “We have to make sure these measures are joined up with our policy on long-term care so that we have the right outcome. “
The Institute for Fiscal Studies says annuity rates will go up as the market shrinks and providers have to insurer fewer people.
Barclays analysts expect the annuity market to shrink by two-thirds in the next 18 months, from £12bn to £4bn a year.
Insurers’ share prices dropped signifiantly on the day of the Budget with Partnership falling by over 50 per cent in 24 hours.
Webb has insisted some people will still buy annuities, and is adamant the changes do not mean the “death of annuities”.
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