How pensioners and future retirees will be affected by the 2014 Budget
George Osborneís 2014 Budget was undoubtedly his strongest yet as Chancellor, and could arguably be described as his most radical one as well.
Whilst his remarks about the country needing to export more have been ridiculed for being plainly obvious and his new measures to encourage business investment being criticised for not going far enough to provide a long term solution to poor productivity levels, there are other areas which have done nothing but enhance the Chancellorís reputation, and bolster the Tory prospects heading into the General Election next year.
In particular, Mr Osborne has commendably garnered widespread acclaim for his new policies for pensioners that are both innovative and deep-seated in their scope. For all who are unfamiliar with what was identified on Wednesday last week, below will detail you in with all the important information to do with his reforming measures, including what they are, how they will affect you, and the areas their implementation are seeking to address.
The primary reform that Mr Osborne announced was that future pensioners will have a greater degree of freedom when accessing their retirement funds, with all inhibiting measures when trying to acquire funds from a pension pot being ceased from April 2015. The current policy on accessing pension funds necessitates that individuals can only receive 25% of their pension fund tax free and upfront when they first announce their retirement. Whilst this will be retained in large, the level of tax that users have to pay on the remainder of their funds when making a withdrawal will be substantially reduced. This reform will give people greater flexibility with their access to their pension pot, and should enhance their spending power when they retire.
It is also widely believed that the knock-on effect of this policy will be that less people will need to buy an annuity, that have been hugely unpopular for their apparent lack of effectiveness and unsuitableness to providing an adequate pension pot to users, despite their high cost.
Mr Osborne argued that the measure reflected his belief that people should be trusted to utilise their pension funds without being infringed, and branded the policy a liberation of all who had been consistently frustrated by restrictions on the use of money that they had worked hard to acquire and spend when they retire.
He also argued that it would ebb the usage of annuities, which he described as ëold fashionedí and poor value for a multitude of people across the country.
"They may be right for many people, but they are also not right for many others. Returns from annuities have been much lower over the past 15 years or so and in the end people who have saved through their lives and earned that money should be trusted with good advice about what they do with that money" he said.
The people who will be impacted and the affect on annuities
People who currently are part of a workplace pension scheme or a personal pension scheme will benefit the most from the reforms, as they will not have to purchase an annuity later on down the line. The government has encouraged all employers to auto-enrol their workers onto a ëdefined contributioní scheme which has seen both them and their employees putting money into the scheme on a regular basis for future purpose. The knock on effect of this thus far has been that more people have been forced to purchase an annuity, which the government has been criticised for incurring. This is because the low payoutís of annuities and the fixed rates mean that people are being paid out an unsuitable amount to cope with various financial demands over their retirement.
Annuities have become a compulsory purchase for pensioners in recent times, though they have been widely criticised for the low payouts they have been handing out recently and their lack of flexibility. Essential, once you have acquired an annuity, you are fixed into it for a lifetime, and cannot benefit from larger benefits should interest rates pick up. Moreover, if you have any money left from it when you die, your family cannot access it, and instead the money goes to the annuity supplier. So, if you were to purchase an annuity and then perish a year later, then you would have gotten poor value for money and your family would be unable to access the funds. There are some providers who allow users to purchase a guarantee that ensures their families are paid out should they die, but these come at a huge cost and typically result in the family having to pay 55% tax on their payout, which is hardly beneficial considering the costs of the annuity in the first place.
The reality of these deficiencies provoked the Financial Conduct Authority to embark on an investigation of the annuity market, and their report identified their belief that millions of pensioners are currently getting poor value for money from their current deal, particularly those who had had small pension pots. Considering the governmentís hard push and encouragement for employers to auto-enrol employees onto workplace pension schemes, the new policy will be essential to lowering their use and stopping future criticism of the government that they have simply forced people to sign up for poor value products with little long term value.
Whilst some might argue that annuities ensure that people have money till they die, without having to worry about overspending, the reality is that payouts have been low and unsuitable for a while now, with the average rate for 2013 being identified as 6% by Annuity Direct. This is far lower than in the 1990ís, when rates were as high as 15% and perhaps provided a better middle ground solution to having a meaningful pension payout each year, whilst also not overspending so you run out later on in life. The move away from annuities is undoubtedly risky, and places a lot of trust in the money management of pensioners, but will be far better than the current state of annuities, providing that the government does not utilise the enhanced spending power of pensioners as a platform to implement new cuts on pensioner benefits in the future.
Pension provider advice to become legal obligation
The Chancellor also identified that he would be implementing a compulsory and legal obligation on pension suppliers to provide their users with helpful advice about how to use pension pot and to address any queries that they might have. The move is intended to address the issue of poor money usage now that the shackles on fund access have been removed, though whether providers fully adhere to this is highly contentious
Recent statistics released by consumer organisation Which?, indicated that just 42% of pension savers believed that their pension supplier actually acted in their interest, whilst a number of providers have actually been penalised in recent times for mis-selling their product and mis-leading users into signing up for pension deals ill suited to their circumstances.
Whilst the measure is undeniably necessary in order to prevent such activity occurring again, it is nevertheless going to a high financial burden on pension suppliers, and many of them will not be able to subsidise the added costs of the compulsory obligation. Changes to this policy will likely be made later on down the line, in order to make it financially viable and sustainable, though it is a step in the right direction to ensuring that providers do not trick people out of lump sums of cash, or encourage them to engage in risky activity that could comprise their standard of life when it comes to accessing their fund later on in life.
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