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?