Ken Davy  

Pension freedoms idea could all end in tears

Ken Davy

Ken Davy

When discussing the issues that are starting to emerge from the introduction of the pension freedoms, two prophetic sayings come to mind.

The first is ‘the chickens are coming home to roost’, and the second – often used about overexcited children – is ‘it will all end in tears’.

The implications of the pension freedoms for our sector, and those who have used former chancellor George Osborne’s ill-considered introduction of the freedoms to grab their pension cash before reaching retirement age, have still not been fully understood.

I suspect many will rue the day they opted to spend their pension pots early.

Even those who have not spent all their cash will come to regret taking their savings from tax-advantaged and growing funds, to simply deposit them into a bank account earning virtually nothing.

This is not to say that pension freedoms are necessarily wrong in principle, it is much more a case of timing.

In some cases, the opportunity to have early access can be invaluable. However, at age 55 it is almost impossible for most to know how they will feel at retirement, and what their financial and family circumstances will be.

How different would the situation have been if, instead of rushing to introduce pension freedoms at age 55, the chancellor had thought through the options more carefully and simply got rid of the obligation to buy an annuity at retirement?

Such a move would have been universally popular and have delivered virtually all of the benefits of pension freedoms.

This would have created real pension freedom at retirement, and offered the individual the opportunity to decide how to fund their retirement spending when they retired.

Importantly, this is exactly the time when a person facing retirement has to grapple with the realities of living on a pension.

Trying to imagine prior to actually retiring how they are going to feel when that day dawns, and what shape their finances will be in, is virtually impossible until an individual is forced to come face to face with the realities of living on a pension.

I do not know how excited Mr Osborne used to get as a child, but as far as his big pension freedoms idea is concerned, I fear that the reality is it could all end in tears.

So watch out for the chicken coming home to roost.

Ken Davy is group chairman of SimplyBiz