Pot luck pension reforms

Greater flexibility on pensions is good, but more flexibility should not undermine what a pension is all about – providing a secure and decent income in our post-work years, which may amount to three decades or more.

In the latest effort to ‘liberate’ pensions, last week the government announced that the 25 per cent pension tax-free sum available on retirement could instead be drawn at any time and in any amount by those aged 55 and over.

Some of the national newspapers jumped on this as allowing consumers to treat their pensions like a ‘savings account’. Sounds great, but it is utterly stupid, and in practice could lead to unexpected dangers.

Pensions should be as far removed from savings accounts as possible. They are not a ‘dip in at any time’ account; they are a once-in-a-lifetime opportunity to plan for our increasingly long retirements. Like a classic car, pensions need to be looked after and maintained properly before and after retirement to ensure they last for, literally, a lifetime, not driven into the ground at the first opportunity.

Underlying all this is a government seemingly obsessed with creating pensions policy ‘on the hoof’. Death taxes on pension pots? Let us get rid of those. Fair enough. Annuities a bit tricky and a bit restrictive?

No need to buy one, regardless of the income protection they offer. Decades of sound pension policies ripped up in a few months for a series of crowd-pleasing gestures designed to grab headlines.

Of course, all this may have something to do with the fact that a general election is on the way in just over six months

Of course, all this may have something to do with the fact that a general election is on the way in just over six months. I will leave you to decide.

So why am I opposed to more flexibility on the 25 per cent tax-free lump sum? The answer is that I am not opposed per se to more flexibility – I just want more thought given to the consequences and for robust safeguards to be put in place. I question how much thought has really gone into the consequences.

Pensions are not just another savings account, they are a crucial part of most people’s financial planning for the future. Let us face it, most people are rubbish when it comes to financial planning, and duck out of any serious effort to plan their future finances at the earliest opportunity. The one major exception is their pension.

Most people realise they need one, and schemes such as auto-enrolment have encouraged millions of new pension savers. However, the government now seems keen to unravel many years of pension policy on a whim.

When George Osborne announced in the last Budget that the obligation to buy an annuity would be axed, many hailed the new freedom. Others speculated that some people would rush out and buy a Lamborghini with their pension pot on retirement.

Some people may indeed do this, but I think the numbers will be very small. What is more likely is that, as obstacles are removed, people will steadily begin to take more risks with their pension, dipping in to fund a holiday or new car, and eroding future income.

Many could begin to draw down large amounts early on in their retirement only to find that their pension dwindles in later life, just when they need it most. We face the prospect of people aged 60 to 70 burning through their pension quickly and facing poverty when they get past 70 or 75 when the chances of a return to employment to bridge the income gap are very limited.

There is already evidence from the US that additional retirement freedoms there are leading to this sort of scenario. A survey for asset manager BlackRock in the US in 2013 found that more than half of respondents were now worried about outliving their savings. If this happens in the UK it will be a disaster, with the state facing an ever-growing and unsustainable burden as the ‘pension poor’ turn to state benefits in their latter years having ‘blown’ their pension.

All this, of course, makes good pension advice ever more vital. The government promised free ‘pension guidance’ in the Budget, but we have yet to see the detail of what will happen from April.

When it does arrive, experts are already advising that a one-off meeting or quick chat over the phone will not be enough to answer all the questions that pensioners will need answering, and they are right. Free pension guidance is a good idea, but it must be long-term to help consumers avoid potentially disastrous mistakes, such as discovering at the age of 75 that their pension is disappearing just when they have to rely on it more than ever.

Kevin O’Donnell is a financial writer and journalist