For advisers, George Osborne will forever be associated with introducing pension freedoms
The final week of winter was a pretty good one for former chancellor George Osborne. The post-Budget about turn on national insurance by his successor left his own U-turns look pretty minor by comparison. Then on March 17 – to widespread amazement – he landed a(nother) job, this time as editor of London newspaper. A nice change of pace for a man used to making the headlines rather than writing them.
However, a small set of figures released last week, buried away in the ongoing drama of the Budget, Brexit, Scottish independence and media magnates, paints a less positive picture for the MP for Tatton.
For the population as a whole, Mr Osborne will forever be associated with austerity, the consequences of which will be with us for a long time to come. For advisers, his role in introducing pension freedoms also comes to mind.
The reforms may have been far less controversial than his policy of fiscal retrenchment, but they carried with them risks of their own. And data released in mid-March might represent the first indication that these risks are real and rising.
Figures released by the Office for Budget Responsibility (OBR) show that the tax-take from those withdrawing their funds from the age of 55 onwards totalled £1.5bn in 2015/16 – five times more than first estimated. A running estimate for 2016/17 predicts a slight drop to £1.1bn, but even this figure is still twice as high as the original forecast.
The initial predictions also factored in individuals spreading their withdrawals over four years. But the amounts being taken out have been large enough for the OBR to reduce this estimate to three years.
In total, it now expects £1.6bn in revenue arising from the freedoms in 2017/18, followed by an additional £900m for the subsequent financial years of this Parliament.
The placing of this information, well past page 220 of a 230-something page document, is probably just coincidence. The OBR has more pressing matters to attend to, after all, and the figures are peanuts in the grand scheme of government. From a policymaker perspective, the tax-take will be enough to judge the reforms a success. For everyone else, the figures will require some closer scrutiny.
The problem, some say, is that we don’t have the right data to analyse this announcement correctly. We don’t know the profile of those drawing down their pots, or even how much was in those pots to start with, so how can we tell whether the trend is benign or alarming?
There is truth to this. But by the same token, the figures will only harden the opinions of those who say retirees’ apocryphal blow-out purchases may not be so far from reality after all. What we do have is FCA data showing that more than half of all withdrawals are of the “in full, in cash” variety. By contrast, the proportion opting to take a partial amount as a lump sum, and then leaving the rest, is sitting at around 10 per cent.
These figures aside, information has been relatively scarce, particularly on just who is making use of their pots. We must hope this is a case of it being early days in the life of the freedoms rather than because no one has sought to gather anything.
In the meantime, though, there is one conclusion we can draw from the experiences so far. It relates to Pension Wise and its forthcoming successor, which will merge that body with the Pensions Advisory Service. Take-up of the guidance services offered by Pension Wise has been relatively low. The way in which the replacement body is funded has yet to be confirmed, but advisers will continue to pay for at least part of it.
The former effect is unwelcome, and the latter a particular annoyance to IFAs given the apparent lack of consumer interest.
One way to resolve both would be to make guidance mandatory for those seeking to make use of Pensions Wise. This would limit the risk that those who are taking their pots end up with nothing to fall back on in their old age, and also increase the likelihood that the better off will seek more considered help in the form of financial advice.
