Pension Freedoms likely to continue

Pensions are complicated. Everybody would agree with that. If they were simple I would be out of a job. However over the last 5 years that has started to change. Recently they got a whole lot simpler. Hopefully now the General Election is over these revolutionary changes will now stick around for at least another 5 years. However Super Steve Webb, one of the architects of pension freedoms, was always going to lose his job.

A Short History of Pensions Ministers

May 1997
Harriet Harman: Secretary of State for Social Security
Frank Field: Minister of State for Welfare Reform

July 1998
Alastair Darling: Secretary of State for Social Security
John Denham: Minister for Pensions

January 1999
Alastair Darling: Secretary of State for Social Security
Stephen Timms: Minister for Pensions

July 1999
Alastair Darling: Secretary of State for Social Security
Jeff Rooker: Pensions Minister

May 2001
Alastair Darling: Secretary of State for Work and Pensions
Ian McCartney: Pensions Minister

May 2002
Andrew Smith: Secretary of State for Work and Pensions
Ian McCartney: Pensions Minister

June 2003
Andrew Smith: Secretary of State for Work and Pensions
Malcolm Wicks: Pensions Minister

September 2004
Alan Johnson: Secretary of State for Work and Pensions
Malcolm Wicks: Pensions Minister

May 2005
David Blunkett: Secretary of State for Work and Pensions
Stephen Timms: Pensions Minister

November 2005
John Hutton: Secretary of State for Work and Pensions
Stephen Timms: Minister for Pensions Reform

May 2006
John Hutton: Secretary of State for Work and Pensions
James Purnell: Minister for Pensions Reform

June 2007
Peter Hain: Secretary of State for Work and Pensions
Mike O’Brien: Minister for Pensions Reform

January 2008
James Purnell Secretary of State for Work and Pensions
Mike O’Brien Minister for Pensions Reform

October 2008
James Purnell: Secretary of State for Work and Pensions
Rosie Winterton: Minister for Pensions Reform

June 2009
Yvette Cooper: Secretary of State for Work and Pensions
Angela Eagle: Minister for Pensions Reform

May 2010 to Today
Iain Duncan Smith: Secretary of State for Work and Pensions

Steve Webb: Minister for Pensions

Who want’s to be a pensions minister, I don’t

The job as pensions minister was created by Labour in 1998. It falls within the Secretary of State for Work and Pensions team. Nobody wanted it. It just wasn’t sexy. It was long term, but it was manned by journeymen (and latterly journeywomen, “we better promote some of those”). You got the job if you were up and coming. A first ministerial post on your political ladder to greatness. Or you got the job as you fell from grace. A sort of stepping stone to being put to pasture quietly. Cabinet reshuffle after reshuffle, the team changed. Pensions legislation continued to stagnate because Labour insisted on means-tested benefits. There was no incentive to save, and it would take for ever to get fair value back out of the decades of saving into pensions.

From 1997 to 2010 Labour had 15 different pension teams.

I defy anyone, no matter how brilliant, to understand pension legislation in such a short time frame. It’s no wonder decisions made to simplify pensions, just made them more complicated. Good news for advisers like me, bad news for pensions savers.

From 2010 to 2015 The Coalition had just the one team.

The rise and fall of Pensions Super Steve

Narrator: As an outsider, it looked like a mistake from the get-go. The Conservatives needed to share some ministerial posts.

Mr Cameron: How about Minister for Pensions to the Lib Dems, nobody wants it anyway. All agreed? Good. Don’t care who it is.

enter Steve Webb stage right to utter silence

Narrator: I have to say Steve Webb, the Lib Dem who got the post as minister, has done an outstanding job for a whole generation of us savers. He has overseen a wholesale restructuring of pensions. The new pension freedoms have and will continue to change peoples lives for the better.

Mr Cameron: Well done Steve. Your pension reforms have probably helped to clinch the General Election for us. Your job is safe.

Mr Webb: There is no coalition anymore and I lost my seat as an MP.

Mr Cameron: Saves firing you then. Goodbye. I’m off to see The Queen.

exit Steve Webb stage left to utter silence

It’s now your money!

Pensions eh!

You save your whole life and then you want to retire.  You want to now spend all the money that you have put into your pensions for all these years.  For 28 years I have been telling clients that your pension fund is actually not your money; if it was your money, you could just go out and spend it all couldn’t you.  Well you can’t.  Only 25% is truly yours and the rest is in a trust.  You can only spend a set amount, a set amount deemed sensible by some Treasury Mandarin who hasn’t got a pension at all similar to yours.

The Pensions Freedom Bill

In a few short weeks now all that changes. From 6th April The “We know best” period finishes and you can for the first time spend your pension pot at the rate you decide.  Of course there is the question of income tax on what you draw out, but you had tax-relief on what you invested. You should end up no worse than even.

Why Change Now?

These changes have come about because of this coalition government. Steve Webb the pensions minister, actually the longest serving pension minister since the job was created, just got stuck in and brought about change. Unfortunately he is about to lose his job. As a Lib Dem he has little chance of retaining his role after the next general election in May. However there is broad cross party support and the next pension minister is likely to be a short term lazy journeyman who changes nothing.

What’s Next?

So big changes to come for every client with a pension fund over the age of 55. You will be hearing from us in the new tax year.

Flexi-Access Drawdown

Pension legislation constantly changes. Previously it has never got any better for the investors. But never before have I seen such common sense exhibited. I am a tad sceptical. I can only deduce that the Government have actually asked someone who owns a personal pension what they would do.

No skin in the game

I have always been deeply sceptical of the civil servants deciding our future. They didn’t have any of their “skin in the game”. They could do what they wanted from high up in their ivory towers. They could never get hurt because they had generous, index-linked, final-salary, Government-backed, tax-payer funded, generous (I’ve said that already I know but I can’t emphasise it enough) pension schemes. They have no worries for the rest of their lives. Asking a typical civil-servant to try to understand the real world of pensions, like the ones you and me own, is impossible. It’s like asking me to judge an 18 metre diving competition. I’ve never done it and I can’t ever see me wanting to go up there either. What would I know?

Here are the basic changes. Wow!
  • No need to buy an annuity (ok – this hasn’t been the case for some time for those with larger pots)
  • Unlimited withdrawals from your pension pot (ok – subject to income tax but you are only giving back the leg-up HMRC gave you when you contributed)
  • No Inheritance Tax on any final balance you pass to your kids on death  (ok – if you are like me there won’t be much left by the time you die anyway if we enjoy a life full of adventures)
How good does it look?

Never again can the Nanny State tell us at what rate they consider it sensible to be spending our life savings. For the first time we can realistically spend our pension pots. Previously it was just about impossible not to die before your pension savings were spent.

Put simply.

For the over 55’s a pension now looks a whole lot like a bank account. A bank account where you can make any size of withdrawal at any time. You want to spend £8000 on a blow-out family holiday? Of course, just draw out £10000 and send £2000 to HMRC.

Surely that’s irresponsible of the Government

Well let’s take a look at the average over 55 person. They are a baby-boomer. They have a “mend and make do” mentality. In short they have spent a lifetime so far carefully saving money. Ask them to spend a large amount and they get palpitations. It’s just not in their psyche. I’m almost 53 and I include myself in this baby-boomer group. When I buy anything it usually comes hand in hand with a healthy dose of buyers remorse.

And spending a lot of money sometimes feels stupid. We may run out. We are not stupid, as Rickie Lee Jones said in 1979

Because there ain’t no man
Who got the money in his hand
Who got any of that bread
Bein’ slow in the head

Freedom from pension slavery

So we now have pension freedom after all these years. But with it comes a larger amount of sensible planning and self-control. Pensions just became a whole lot better but also a life-sentence of investment decisions. I look forward to the continued journey with all my clients.

Free at last. Free at last.

I hope it lasts.

It gets my vote

The next general election is different from previous ones.  There is no guesswork as the date has already been set. The general election will be held on the 7th May 2015.  So when major changes are announced with regard to pension regulation that don’t fully come into being until the 6th April 2015, I know better than to get over excited.

The most revolutionary changes ever announced, that should put savers back in control of their pension life savings, may never be fully implemented.  If I was a socialist I would say that these proposed pension changes are nothing more than vote winning promises.  Promises made by the same ministers who reduced the maximum you could take from your pension pots when they first got in to power by 20%. The same ministers who have subsequently drastically reduced the total of the pot you could build in your working lifetime from £1.8m to £1.25m.   The same ministers who took 2006’s pension simplification and made things complicated again. Pension Complication.

But this blog isn’t to criticise.  It is to help our clients to benefit from these revolutionary changes, even if we have a very limited window within which we can benefit.  It is imperative we get together this year if you are one of my clients who are in pension drawdown or are considering pension drawdown in the future.  The maximum annual withdrawal that can be taken from our pension pots has just got significantly bigger.

In my previous blog I wrote about why annuities often don’t work due to life’s uncertainties.  I didn’t even focus on the fact that they were very poor value usually.

For Example. A pensioner drawing an income of £10000 a year ago has already just seen his income moved back to £12000 a year.  Now within a year it will become £15000 a year.  If all these promises go through we will probably be advising a typical client to withdraw around £40000 a year until their pension pot is emptied.  Any income which isn’t required immediately could be channelled into tax free new ISAs.

Its revolutionary.  It turns everything I have hated about pensions around. Earlier I said “our pension pots”.  As I was born in 1961  I can’t touch my pension pot until 18 months after the next general election.  I am therefore not holding my breath for these changes.  Within 18 months the present coalition could renege on election promises or could have lost the general election.  I can’t see either Labour or a Labour led coalition agreeing with these measures.

However, releasing everyones pent up pension pots in the last year of your term will accelerate spending by releasing hundreds of millions of grey pounds, it will boost the economy, it will increase the feel good factor and it should guarantee election victory.  I’m being cynical again – sorry.

Crystal Balls – Yours or Mine

Isn’t it annoying we can’t see into the future. It would certainly make many decisions in life much simpler. Decisions like taking an annuity at retirement.  I have talked about different annuity levels before.

So you have saved for donkeys years into several pension plans and now you just want your money back. Not so fast, first you need to read a 32 page retirement pack and comprehensively predict the future.  Because you can’t just have it all back in one go. Continue reading “Crystal Balls – Yours or Mine”