Getting my hands on the money

Over the years I’ve had several conversations with clients and some accountants which followed a similar path

“I don’t like pensions,” they’d say.

“Why not, “I’d reply.

“I can’t get my hands on the money.”

“If you could get your hands on the money, take it all out, what would you do with it?”

“Well I’d do something that could give me an income. Perhaps buy a property. Get a rental income.”

“But,” I’d respond, “the growth would be taxed, and the income would be taxed. In the pension, the growth is tax free, and the income is taxed. So why not keep it in the pension?”

“Because I can’t get my hands on the money.”

Pensions are for income in retirement. If you want to make them more attractive, reduce the enormous tax rate on death (something I’ve written about on here before). But allow people to take everything out? I’m not sure that’s the answer.

Are Governments the best people to make policy on pensions? I’d suggest not. Pensions is perhaps one of the most important social and economic policy decisions, and yet they are decided by politicians with at most a five year time frame.

This change will, of course, increase tax. Osborne said as much in his speech. One suspects that is the real thinking behind this decision, not the ‘freedom to choose’ ideology.

The idea of ‘protecting the people from themselves’ is, at best, a very controversial standpoint in politics. But look at the level of debt in this country. Give people the chance to access their entire pension fund, and will they act sensibly? All of them? Three quarters of them? I have my doubts.

Once properly advised, and the advantages of having income in retirement from a pot that grows tax free are pointed out, one hopes that the ability to get their hands on the money will be enough, and our clients will continue with their pension fund.

But it’s not our clients that worry me. It’s the smaller pots, the people who don’t receive advice, through choice or cost. The ones who, if their pension is used up (by poor decision making or by financial necessity) then become reliant upon the Welfare State.

The objective of a pension was to provide income in retirement. This change means that this is no longer the case. In thirty years time will we look back and see this as a good move for the country?

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4 thoughts on “Getting my hands on the money

  • Chris: Look at the USA and Australia for the evidence. Do some people p**s there pensions up the lamp post? Yes.

    But enough to justify restricting the options for the rest of us? In my view: No.

    I believe that if people know they can get their money out relatively easily then they’ll put more in and have bigger pots.

    Here’s an analogy for you. When we switched from being tied to independent we choose a network which had no exit penalties (ISL). As a result we stayed there much longer than the 18 months we originally planned to. I suspect that if we’d felt trapped in like other networks do, we would have been itching to get out.

    Behavioural finance (calm down Phil) says that people treat bigger pots of cash with more care than smaller pots.

    So if you make it easier to get the money out, people will save more and then be more likely act responsibly when they reach retirement.

    I’ve had a belly full of the conversations you describe above and am looking forward to having more important conversations like: “How much is enough?” “How much should I draw down?”

    Finally we can start telling people the truth about money without tax-rules from the 20th hijacking their thought processes.

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  • I think this sits firmly in the “we’ll see” pile of Chancellor decisions:

    A boy’s father bought him a horse for his fourteenth birthday and everyone in the village said, “Isn’t that wonderful, the boy got a horse?” and the Zen Master said, “We’ll see.”

    A couple of years later the boy fell from his horse, badly breaking his leg and everyone in the village said, “How awful, he won’t be able to walk properly.” The Zen Master said, “We’ll see.”

    Then, a war broke out and all the young men had to go and fight, but this young man couldn’t because his leg was still messed up and everyone said, “How wonderful!” The Zen Master said, “We’ll see.”

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  • Good post Chris, thanks.

    The ramifications of this are enormous and will only be known over time, as Howard says.

    It certainly makes saving via a pension more attractive and that cannot be a bad thing. Those people wise enough to see the benefits of pension saving (reliefs, tax-free growth etc) are probably those wise enough to know not to spunk it all away in retirement. Or at least, early in retirement!

    Those who cannot grasp this relatively easy concept are probably those who will be dependent on the Welfare State anyway. Don’t forget: in a generation or two every pension will be DC. Taking retirement benefits sensibly will become ingrained, part of the lore.

    There will always be idiots. It is about time pension legislation favoured the 99% who are not. Yesterday’s news was the first step.

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    • One thought in response to both Tim and Nick – I’m not sure people will act any differently, because they can’t trust that the rules won’t change again.

      We have many clients who, for example, committed to putting money into pensions in order to buy their business property, only to find when they thought they had enough that the Govt had changed the rules on borrowing.

      It will take a long time of making no changes to pension rules for people to believe that, by the time they get to retirement, the current rules will be the ones that will apply.

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