“With freedom comes responsibility.” That’s what pretty much every commentator out there says on the new pension freedom rules. They’re right.
If we get to spend our heavily taxpayer-subsidised pension savings as and when we like, we have a responsibility to other taxpayers to make sure we do it right – and in particular, that we don’t spend it too quickly.
Are the UK’s pensioners up to the job? Look to Australia, and it is hard to be sure they are.
The Australians introduced reforms very similar to our new ones around 20 years ago. The result? Happy pensioners. Then broke pensioners.
The over-80s are running out of cash, their financial needs are putting an increasing burden on the state (other taxpayers), and last year the Australian government launched a consultation to see if it should reintroduce some kind of compulsory annuitisation.
Their conclusion was that, given rising longevity and the difficulty people have in planning for it, pensioners should probably be forced to use at least some of their pot to buy an annuity.
And what do the Australians think of our move to pensions freedom? “Sounds like a politician looking to be re-elected”, Deloitte partner Russell Mason told a conference audience in Australia last year. It is a reasonable point.
At MoneyWeek, we are great believers in financial freedom, and we have been thrilled by the moves away from compulsory annuities. But we are also well aware of the problems exemplified by the Australian experience, and reckon there is more change to come here.
The Australian suggestion of partial annuitisation makes some sense. Perhaps everyone could be asked to annuitise their first £100,000 with the income kicking in from age 75, for example.
But there is also the question of the age at which people can access their pensions: 55 seems way too young to get your hands on money that has been topped up by the taxpayer with a view to financing your old age: who retires at 55? An extra ten years saving (and hence ten years less spending) might make all the difference in the UK.