Pension Wonga Day Dawns

[Richmond]

That was my thinking too. The policy is designed to create 'churn' in the economy; not necessarily in the housing market, but also in goods/services ('now we can go on that cruise we always planned on, Mavis! etc) and in financial services.

The feelgood factor amongst boomers will be short lived; especially if/when those that blow the cash come to the government with a begging bowl, claiming they were misinformed. Still, that'll create work for the lawyers, I suppose.

My thinking exactly, churn. I have been thinking about this and here is my take on it.

Buying an annuity appears to be the worst approach for the taxman. Take a £40,000 pension pot. take 25% tax free, leaves £30,000. Convert that to a annuity and you would get say £1,500 a year for life. While no income tax would be payable on that amount up front, once it has been churned through the system the taxman would have his hands on most of it. However, the most the taxman could get would be £11,500 in year 1 and £1,500 every year after that (decreasing in value each year due to inflation). It would take nearly 20 years to get his hands on the £40,000 (real value would be a lot less). Of course hide it under a mattress or spend it abroad and the taxman gets nothing.

If you took this as an upfront lump sum, the taxman now has the opportunity to get his hands on all £40,000 in year one. Either through up front taxes or through churn. Be a bit smarter and release say £5,000 every year to not pay up front tax, the taxman can get his hands on the £40,000 through churn in around 6 years (dropped in value but still worth more than taking £1,500 for 20 years). Less likely that you will hide all that under your mattress or spend it all abroad. Ultimately this has a greater stimulating effect on the economy as more cash is flowing around it at any given point (either spent by the government or by businesses) - probably leading to more lending, debt creation etc as well. Plus the feel good factor. All this extra cash and the government can probably pay for all these people who fall back on the state pension once they have spent their cash .

What I don't know is how easy it is for the taxman to get his hands an lump sums that are being used to provide an annuity and how quickly he can do this. I also don't know whether it ultimately ends up being neutral. In the first case you have everyone over the age of say 65 taking a small amount each year. In the second case you get everyone who hits 65 taking a large amount and nothing more. So in any given year, are the annuities of every pensioner over 65 similar in value to the amount taken out by a single group of people who turn 65? If so it has a positive benefit initially but eventually works back to a neutral position. What percentage of pensioners lose the gamble and die before the annuity has fully paid out vs those that win.....

[juvenal]

I've just raked through as couple of dozen articles which mention the average sized pension pot at retirement. 95% stated roughly £33,000 or less. Only one put it at £75K.

How many can get into BTL with this paltry amount, let alone after the taxman has taken his whack?

[Neverwhere]

Emphasis added and all that jazz:

£1bn taken out of pension pots is a sign of new policy's success, says Osborne - The Guardian

However, some of Britain’s biggest pension companies have been criticised in recent days for refusing to let retirees withdraw cash from their retirement pots, leading some observers in the media to brand the policy a fiasco. It’s been claimed the policy was rushed into the market in time for the election, and that the pensions industry was not given sufficient time to prepare.

Against that background, George Osborne on Tuesday declared that the freedoms were a success.

“So far, in the few weeks since they came into effect, 60,000 people have made use of them. More than £1bn has been transferred out of people’s pension funds as a result. It is a sign that this is a real success, but we have to make sure that people get the best advice, that the market responds, and that companies up their game in helping customers make use of these freedoms. We will be watching these things very carefully,” he told the Commons.

More than £1bn pension savings cashed in following UK reforms - Financial Times

“I would suggest that a more appropriate measure of success will not come for many years, when those people who have withdrawn money from their pensions are still enjoying the retirement they planned and saved many years for.”

Pension reforms resemble 'botched DIY job' - Professional Adviser

The Chancellor George Osborne has announced plans to consult on "excessive" early exit fees faced by savers looking to take advantage of the reforms, in the latest update to the government's retirement reforms.

It follows the roll-out in April of widespread changes to the way savers aged 55 or over can access their defined contribution pots.

The 'freedoms' were first announced in March 2014.

But the government has come in for fresh criticism for "rushing in" the reforms.

TUC general secretary Frances O'Grady said: "Pensions freedom is looking increasingly like a botched DIY job. The Chancellor is attempting to shave a bit off here and add a bit there just to make his flagship policy work.

"There were plenty of warnings that rushing in these changes was unwise. We need genuine action to remove unfair fees and charges on all pensions. Piecemeal reform would just be letting savers down."

George Osborne to consult on cutting UK pension exit charges - Financial Times

“We are investigating how to remove barriers, are now considering a cap on charges, and are asking the Financial Conduct Authority to investigate.”

Just give us our cash! Big insurers must stop blocking savers from using the pensions freedoms - This is MONEY

The insurers did warn that the rules were being rushed through. Because of this, their trade body, the Association of British Insurers, has begged the Government not to start pointing fingers.

But it’s hard to justify this call: its own house is not in order and its members are doing as they please. In the meantime, thousands of savers are being trapped.

They have a different vision of their retirement than the finance firms who looked after their pension.

They’ve got buy-to-let income, other investments, have sold a business or — like Wilson Smith — they want to carry out a lifelong wish.

An annuity, the guarantees built into their pension or a drawdown plan are no good for them. They’re intelligent, have their own plan and just want the cash.

That this plan doesn’t involve the help of an insurer or a financial adviser is why these firms refuse to give them their money.

As a result, they’re robbing you of your retirement.

Government plans cap on pension fund withdrawal charges - The Guardian

Tom McPhail, head of pensions research at financial advisers Hargreaves Lansdown, warned on Tuesday that the magnitude of the change should not be underestimated.

“This is a reform of equal magnitude to the Right to Buy council house sales revolution of the 1980s,” he said. “In the same way that Margaret Thatcher introduced millions of people to home ownership, George Osborne is now introducing millions of people to pension ownership.”

The trials of unlocking my nest egg and the jobsworths sabotaging the pensions revolution - Daily Mail

Over the past few days, the Mail has been full of pieces demonstrating that .George Osborne’s great pensions revolution is turning out to be an unbelievable nightmare for thousands of people.

Despite new rules allowing those over 55 unprecedented access to their pension pots, there is ample evidence that insurance companies have been obstructive, grasping or mindlessly bureaucratic.

Savers who do succeed in cashing in their pensions also frequently find they have been subject to swingeing rates of tax.

. . .

And then there is HMRC. If you cash in a pension pot of, say, £20,000, the tax authorities will assume, in their wisdom, that this payment is repeated every month throughout the whole of the tax year, and that your income is far larger than it actually is. So you will find your cherished pot has been subjected to the top rate of tax, irrespective of your actual annual income. This means you may have to go to the bother of filling in forms to reclaim what you should not have been charged.

Pension freedoms: 60,000 pots unlocked - The Telegraph

So who are these people accessing their money, and what have they done with it? Most were savers with modest pots who needed to cash in their pensions to escape debt.

Jamie Jenkins, head of pensions at Standard Life, said: “Repaying debts was the major driver for wanting access. We saw some customers who were three months behind with the mortgage. They just wanted the money and didn’t care how much tax they paid.”

The tax issue is less onerous for those encashing small pots of less than £30,000, which partly explains the stampede to surrender these smaller sums.

Robert Cochran, Scottish Widows’ head of retirement, said: “Most of the policies being encashed are too small to provide any sensible income in retirement, so they may as well have the cash.”

A Telegraph Money survey of the largest companies points to around half of the policies cashed in being worth less than £10,000, with eight out of 10 worth less than £30,000. The average withdrawal is around £17,000.

[shindigger]

I will hopefully take the lot under trivial commutation when the time arrives.

Was always the plan.

Not contributed to the city hooker and coke slush fund for over ten years.

[Bugger BTL]

I've just raked through as couple of dozen articles which mention the average sized pension pot at retirement. 95% stated roughly £33,000 or less. Only one put it at £75K.

How many can get into BTL with this paltry amount, let alone after the taxman has taken his whack?

Oh I'm sure plenty will find a way to propel themselves as far up the creek as possible. I should think most people would have enough for a 5% deposit somewhere, and after that it's money for nothing and a million percent yield, right?

[winkie]

That was my thinking too. The policy is designed to create 'churn' in the economy; not necessarily in the housing market, but also in goods/services ('now we can go on that cruise we always planned on, Mavis! etc) and in financial services.

The feelgood factor amongst boomers will be short lived; especially if/when those that blow the cash come to the government with a begging bowl, claiming they were misinformed. Still, that'll create work for the lawyers, I suppose.

Churn.....what a great word......I agree buy now pay later, spend today nothing left later......short-term policies, short-term governance, for short-term thinkers....use it today for tomorrow it will be gone.

[crashmonitor]

I came across a client's policy that had a mere nine years to run this week and will pay a guaranteed flat rate annuity of £9,000 ( increasing with annual bonuses) subject to maintaining annual premiums of less than £1,000. So should still be worth £9,000 or more in real terms by then.

And yet the aged 55 + encashment option is coming in at £37,000.

Talk about the insurance company trying to do a fit up job.

The reality of some old retirement annuity contracts is that if you encash you give up valuable guarantees, so in reality there is no choice. Only one option, unless the law changes, wait for the annuity.

Edited June 19, 2015 by crashmonitor

[Neverwhere]

Oh I'm sure plenty will find a way to propel themselves as far up the creek as possible. I should think most people would have enough for a 5% deposit somewhere, and after that it's money for nothing and a million percent yield, right?

That may have been Osborne's intention but according to Standard Life most of the people who have taken advantage of the new pension freedoms so far have done so to pay down debt, not load up with more of it. The intention may have been to expand the money supply but it looks like the effect may have actually been to contract it.

[olde guto]

That may have been Osborne's intention but according to Standard Life most of the people who have taken advantage of the new pension freedoms so far have done so to pay down debt, not load up with more of it. The intention may have been to expand the money supply but it looks like the effect may have actually been to contract it.

In a way not really surprising if you think about it, someone has a couple of thousand on their credit and know they'll never clear it from their wage packet so they use this "windfall" to pay off their debts. The interesting thing will be whether they'll start splashing away on the credit cards or personal loans again. If they don't things will start to get tough for Osbourne as the spending boom he was hoping to generate doesn't materialise.

[Neverwhere]

In a way not really surprising if you think about it, someone has a couple of thousand on their credit and know they'll never clear it from their wage packet so they use this "windfall" to pay off their debts. The interesting thing will be whether they'll start splashing away on the credit cards or personal loans again. If they don't things will start to get tough for Osbourne as the spending boom he was hoping to generate doesn't materialise.

I think he's going to be out of luck, after 55 surely anyone sensible enough to pay down debts would be unlikely to start racking them up again with so few years to go to retirement? The ones who've withdrawn the cash because they're "three months behind with the mortgage" look like they're only just staving off bankruptcy as it is.

The whole thing is looking increasingly ill-thought through:

Pension companies tell Osborne to lift saver protections that prevent retirees accessing pots without getting advice first - This is MONEY

Pension companies have come under fire since the reforms - which allow savers to access their pension savings more flexibly from age 55 - were introduced in April.

Many savers have been told they cannot access their money unless they receive advice while others have faced punishing exit fees running to thousands of pounds to get their cash.

However, insurers say many of the barriers savers have faced are the result of so-called protections for customers that the Government and regulator have demanded.

If savers have more than £30,000 in their pension pot, or if their plan comes with valuable guaranteed annuity rates that would be lost if they drew down cash from their scheme, they are required to get financial advice.

Advice typically costs more than £1,000 and many advisers are refusing to endorse the withdrawal of money in fear that they may have to face a mis-selling claim in the future if the decision proves costly for the customer.

The ABI has requested the Chancellor now enact an 'action plan' that would remove the requirement for advice in these circumstances.

Not to mention overblown:

£1bn pension freedom figure is not the whole truth - AOL Money

Chancellor George Osborne has said £1 billion of pension cash has been put into the pockets of retirees since the pension freedoms were introduced on 6 April. The government is using the large headline figure to congratulate itself on a job well done.

However, the Treasury can't tell us by what route that £1 billion made it from pensions to pockets. I've asked the Treasury press office for a breakdown of how much of that £1 billion was tax-free cash that would have been available anyway, how much would have been available under the 'trivial commutation' rules that already allowed access to pension pots under £30,000, how much has come from annuities and how much is drawdown.

The short answer is the Treasury doesn't have that information. This means there is no way of guessing just how successful pension freedom has been.