George Osborne’s reforms have freed up people’s pension cash - now they can spend it on cars, yachts and travel even before they retire
Fifty-five-year-old Andy Williams from Fife plans to retire in 10 years – and his first move will be to withdraw all his money from his pension fund.
He doesn’t want to spend what he estimates will be £40,000 on a fast car or exotic holiday; instead he wants to use the money to improve the care for his wife, who suffers from MS, and the lives of his four daughters. “My pension has been very disappointing and was never going to provide an adequate income for me and my wife in retirement,” he says.
Five hundred miles further south, 57-year-old Sheila Price, a production accountant in Hastings, has two pension pots with a combined value of £280,000, nearly eight times that of Williams’s fund. But, like Williams, she also plans to withdraw a big chunk from her pension fund in the next few years and shun annuities. She will use the money to pay off a credit card and perhaps fund a career change. “I believe we should have the right to choose what to do with our money,” she says.
Andy and Sheila are typical of many thousands of people in their 50s and above who welcome the new pension freedoms, which start on 6 April and have been described as the greatest transformation of the UK pensions system since the introduction of the old-age pension in 1906. In effect, from that date, anyone over the age of 55 will be able to take what they want, when they want, from their pension funds and will no longer be herded into buying an annuity.
Annuities, the insurance contracts that most people swap their pension pots for, and which provide a regular monthly sum throughout retirement, have long had a bad reputation. This is partly because many see them as poor value for money: a hefty £100,000 pension pot would buy a 65-year old man an income of £5,500 a year at current rates, according to figures from financial firm Hargreaves Lansdown. Not much – especially when you consider that the average pot size for someone buying an annuity is closer to £30,000. They are also controversial because if someone dies before the annuity expires – and this could be the day after they pay for one – the remaining money becomes the property of the insurer.
Now, instead, 5 million people will be eligible to access their pension pot within the next five years, according to the National Association of Pension Funds – and many of them clearly intend to do so.
Annuity sales plunged by 64% in 2014 compared with the previous year, as thousands of people wait instead to access their money in April. Actuarial firm Hymans Robertson estimates that as much as £6bn will be released from pension pots in the first four months of the reforms.
The radical changes, announced last March by George Osborne in his budget, are part of a wider pensions shake-up that has included an overhaul of the state pension, making it a flat-rate £155 a week for all and an abolition of the “pension death tax”, the 55% tax charge on beneficiaries inheriting pensions.
The pensions minister, Steve Webb, told the Observer that the reforms are a risk, but one that sees an end to a paternalistic approach that led to “mandatory annuities and a lot of dissatisfied people”. He describes the changes as “genuinely coalition” and not something driven by either the Conservatives or Liberal Democrats separately. Nevertheless, it is the Conservatives who are likely to be the biggest beneficiaries of the reforms, with some commentators speculating that it could be the thing that clinches an election victory for the Tory party.
The reforms are undoubtedly popular and a change of government would be unlikely to undo them. “The toothpaste is out of the tube and it would be very difficult to put it back in,” says Webb.
Ros Altmann, as well as being the government’s Older Workers Business Champion, has campaigned for years for an end to compulsory annuities. She is hugely supportive of the reforms, which she describes as stunning. “I don’t think anybody can exaggerate the impact of what has happened. People were being forced to buy an annuity when it was clear that they were being sold products that were not only not suitable for them a lot of the time but that they then couldn’t change once they had taken them out,” she says.
Annuities were always billed as being “safe” products, she says. They were anything but. “For many people, they were the very riskiest product they ever bought as they only cover you against one risk: the risk of living a long time. People just didn’t understand that they could lose the lot if they died tomorrow.”
But it’s not just financial experts and campaigners who are happy about the reforms. Plenty of companies from travel agencies to double-glazing operations are eagerly awaiting a surge in spending.
“The reforms are basically QE [quantitative easing] for consumers,” says Richard Downs, who runs cruiseship travel specialists Iglu and Planet Cruise. “The whole cruiseship industry is gearing up for the April pensions change.”
Bob Atkinson, travel expert at TravelSupermarket, agrees that more money will be spent on travel. “A large group of people are going to suddenly have access to a pot of money that will give them the opportunity to take a long-haul holiday or visit friends and family in far-flung places like Australia,” he says. “When people were given PPI repayments, many of them spent it on travel, cars and luxury goods. People may see this money in the same way.”
Conservatory salesmen could also get a shot in the arm if older people use the money to build that long dreamed-of conservatory. Double-glazing specialist Everest says it is expecting an increase in demand for its products, once the flexible changes come in. “We’re very optimistic that this new legislation will stimulate the economy as more customers use the opportunity to transform their homes, not just improve them,” says Ben Hitchcock, marketing director at Everest.
Car dealerships are gearing up for a boost in sales. Webb made headlines last year, saying he was “relaxed” about how people spent their retirement fund, even “if people do get a Lamborghini, and end up on the state pension”.
One of the biggest beneficiaries, however, could be the property market. A recent survey from the Bank of Ireland found that 29% of retirees nationwide were planning to use their pension to buy property. “There is going to be a stampede into property from those who were contemplating a low-yield annuity,” says Mark Hayward, managing director of the National Association of Estate Agents. “They will predominantly be buying first-time buyer properties [to let] and will be in a good position to do so, as they will be buying with cash.”
Henry Sherwood, a buying agent, says he has already had inquiries from parents wishing to buy homes for their children with their pension funds. “Our advice to parents is to take full advantage of the new rules to help secure their children a place on the property ladder,” he says. “If a parent bought their child a £500,000 property today, in 20 years it could potentially be worth up to £1.5m.”
However, the reality may be more mundane. A survey of more than 10,000 over-50s by Saga found that two-thirds said that once they had taken their tax-free lump sum, they would use the rest to “secure a sustainable future income”. A further 10% would use initial funds to pay off their mortgage and other debt, and 8% said they would take a holiday or buy themselves a few treats. A fifth said their pension pot was quite small and they would therefore cash in the lot. Only 54 said they would buy a sports car.
Not everyone is so enthused about the unfettered access to retirement savings. Many in the pensions industry and beyond think people will spectacularly underestimate their life expectancy or just not consider it all, leaving themselves with only the bare minimum later.
Chris Noon, a pensions expert from Hymans Robertson, thinks the reforms will lead to the average pension pot being spent in 10 years, with many extinguished much quicker than that.
“The new flexibilities are going to force people to spend money in retirement more quickly that they would in the past,” he says. “That puts more pressure on the state pension. I don’t think people are ready for this sort of change.” Critics have pointed to the situation in Australia, where the purchase of annuities is not compulsory. There, two-thirds of people have spent their pension pot before they reach the end of retirement.
Crucially, all of this potential spending frenzy is dependent on people being able to access their money in the first place. There is growing concern that a large number of pension providers are not ready to offer access to the cash people want come April, or are just not prepared to change their systems. Last week, the industry rounded on the government, accusing it of rushing through the reforms and failing to set up the guidance service, which is meant to help the over-55s decide what to do, properly.
Whatever happens, savers such as Andy Williams do not intend to go back on their plans to access their cash.
“Both my wife’s father and my father had great plans for retirement and neither made it to pension age,” he says.
“You never really know what is round the corner, so I think if the government makes this available to me, I’m taking it.”
PENSIONS WHAT ARE THE NEW RULES?
■ From 6 April, anyone over the age of 55 can take out all of their pension as cash and will no longer have to buy an annuity. It is already possible to avoid annuities but the rules governing it mean that generally only the very wealthy do this.
■ You will be able to take 25% of your fund tax-free and withdraw, if you want to, as much or as little of the rest of your money as you like. You will be taxed on this at your marginal rate (20%, 40% or 45%) rather than the 55% that you would be subject to now if you did this.
■ The changes apply to those in defined contribution (sometimes known as money purchase) pension schemes. Those in defined benefit, or final salary schemes, can only take advantage of the freedoms if they transfer to a DC scheme. But if you are in an unfunded defined benefit scheme (such as nurses and soldiers), you won’t be able to transfer from April.
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