The new pension system: what to do now

By now, you should know all about the new pensions system announced by George Osborne and under consultation for the next 12 weeks (see here if not). You might not be entirely sure what you should do about it. The first thing to say is that you should read this week’s magazine as well as my article on the matter of the Life Time Allowance (LTA).

If you are young and saving well, you might need to stop saving into your pension sharpish and hang on until you can take advantage of the new Isa arrangements.

Note that £15,000 in tax-free savings a year, even averagely invested, should end up enough to fund most retirements (do it for 20 years, compound it at 5% and you’ll have well over half a million pounds).

If you haven’t got an LTA problem, ­perhaps you are relatively close to retirement or haven’t got far with your saving yet,­ you can pile money into your pension with more confidence than you could a few days ago (knowing you will have full long-term control over your own money makes a real difference).

If you have already retired and entered drawdown, note that in the interim before the new system comes into place, there is to be a relaxation on the capped and flexible drawdown rules, ­although you can only ask to have your drawdown income raised on the next anniversary of the setting up of your scheme.

That’s good news and means that, realistically, you need do nothing except look forward to the day (not far off) when the whole idea of drawdown limits disappears.

If you are about to retire and are thinking about taking an annuity, don’t. You are probably better off either delaying or entering drawdown. Annuities won’t disappear completely, but if you really want one (and in theory, there are endless good reasons to have one), I suspect you’ll find that next year’s deals are rather better than this year’s.

The real question this week, however, is not for those in drawdown, but for those who have already bought an annuity. That’s 5.2 million people since the turn of the century, many of whom will have locked themselves into stunningly low-rate products.

Is there any way out for this huge (and presumably very, very irritated) group? If you have bought in the last 30 days, you are OK. You are still in the cooling off period most insurers have in their contracts. Call now and ask about cancelling. LV and MGM Advantage have both extended their cooling off periods to 60 days so you may have a chance there too.

The Sunday Times also reports that NFU Mutual is promising to refund anyone who bought as far back as 19 January, and Standard Life has set a date of 13 February.

Aviva has also said it will “look at cases” of relatively recent purchases. Otherwise, you can only hope. Dan Hyde, writing in The Telegraph, calls for an “amnesty” under which anyone who has bought in the very low-rate environment of the last three years should be able to ask for their money back from their insurer.

But given that annuities are private contracts between the insurer and the client, it is hard to see how the government could make that happen, even if it wanted to. Governments can change legislation, but they shouldn’t be able to demand retrospective change to individual private contracts.

  • MickHudson

    Some very dangerous guidance in the article. An annuity is still the right choice for a significant number of people, providing that it is from the whole of the market and with full medical underwriting. Likewise, a significant number of people are not suited to drawdown, just as they weren’t prior to the budget.

    Every individual’s circumstances has to be judged on their own merits. Sweeping statements such as “If you are about to retire and are thinking about taking an annuity, don’t” and “If you have bought in the last 30 days, you are OK…Call now and ask about cancelling” just adds to the unnecessary hysteria and confusion.

  • Merryn

    @MickHudson You are absolutely right that annuities remain suitable for all sorts of people. But there is now a huge new piece of information in the market – one that everyone needs to take into account. All decisions need to be made again taking that piece of information – and new choice – into account. This is not dangerous guidance – it simply tells everyone who can to think again. Telling them not to bother would be grossly irresponsible.

    • MickHudson

      @Merryn – There’s a difference between encouraging people to consider their options, and making a sweeping statement that no-one should buy an annuity for the foreseeable future and anyone who has bought recently should cancel. The former is sensible guidance; the latter is unnecessary scaremongering.

      If an informed decision was made originally to buy an annuity, nothing in the budget is likely to affect that. The only changes have been an immediate loosening of the drawdown limits, and a future pledge for universal access to flexible drawdown. If capped drawdown was considered and discounted, it is highly unlikely that capped drawdown with fewer restrictions or (effectively) flexible drawdown is going to be any more suitable. There may be exceptions such as if there is little need for income, but if the pension is being used was an income-producing vehicle a suitable annuity purchase last week is probably still a suitable purchase this week.

      On the other hand, if the decision wasn’t informed, by all means they should cancel and start the process over again. It all depends on the individual’s circumstances, their perception of the different risks of the available options and how actively engaged they were in the buying process.

  • dave21kj

    I agree the changes are big and anyone on the verge of a decision should pause and review it. As I see it the whole “options and choices” have opened up. It should be the case that the annuity market needs to work a bit harder to get some business, and this could mean that rates go up.
    In my case I had reduced my AVC contributions from 20% to 10% to 5% on the worry of the government stealing my money. Now for Pensions the 25% lump sum is still there plus I have more flexibility on the remaining pot. Pensions or ISAs is my dilemma?
    Merryn: Hope MW take a view here!

  • Aitch

    Am I missing something, the advantage of tax relief seems to be overlooked with all this excitement about the increased ISA allowance. In real terms as a higher rate tax payer you will need to earn £25000 before you will have £15000. The same £15000 in a pension would only cost you the equivalent of £9000.!! Thats still a very persuasive argument to save within a pension.

    • 4caster

      You are double-counting here, Aitch.
      To place £15,000 in an ISA costs £15,000, whatever your tax status is.
      To place £15,000 in a personal pension costs £9,000 if you are a 40% taxpayer.

  • Impromptu

    I think many people, particularly those in peripatetic or freelance work, have been pretty much regarding SS ISAs as a flexible savings/pension vehicle for some time.
    In this respect, loosening the corsets around upcoming pensions is possibly just a transitional measure.

  • Alec

    A few years ago annuities produced a reasonable return for retirement. However Osborne and Cameron,and of course the Bank of England managed to reck the annuity industry through zero interest rates, funding for lending, QE and help to buy and at the same time stealing billions of pounds from savers and pensioners all in the name of inflating house prices. What a way to run the economy!

  • Jim T

    Firstly, as a new subscriber, I love reading MoneyWeek magazine! I have read enough so far to know that ISA’s rate highly as a savings vehicle compared to pensions. However, as someone has already commented, the issue of tax relief, in my opinion, weighs heavily in favour of pensions for higher-rate tax payers who get 40% tax relief but are likely to pay only 20% tax on drawdown. That is a massive advantage compared to an ISA. In addition, if contributions are made via salary sacrifice, you also get the benefit of immediate 40% tax relief plus the NI contribution savings passed on to you from your employer. Also, how many young people will have the self-discipline not to raid their ISA savings in today’s world, which you can’t do with a pension? The recent changes to both pensions and ISA’s are, or course, very welcome but, for me, pensions still win it because of that tax relief!

  • Merryn

    @Jim T. So pleased that you like the magazine! Thank you. We are keen on ISAs for all sorts of reasons. The first has long been the flexibility (use it when you like) but the second is that the tax is paid upfront and there are no more liabilities at all. So you know exactly where you are. Pension savings are not tax free – just tax deferred. So if you rely on them you have no idea what your eventual liability will be (no one knows what income tax rates will be in 20 years) and on our calculations (see mag issues past) there isn’t much of a tax advantage in the end. Pensions are also much more likely to be fiddled with by desperate governments and then of course there is the LTA – which means that a huge number of us will end up paying 55% on our pension income anyway – see this week’s mag tomorrow for more on this

  • Andrew Pearson

    Thanks for this blog and the excellent articles in the 28 March MoneyWeek: I had not previously fully grasped the dangers involved and suspect I am not the only one! I have one question, though. If, at some point in the future, it appears that your pension pot is fast approaching the prevailing LTA and you have the personal financial flexibility to start drawing the pension (and assuming you’re over 55), then surely you simply begin drawing funds to avoid the “supertax”? This may push you into the top band of income tax if you are still earning and/or have other sources of income, but that top rate is still likely to be less than 55%. Am I missing something?

    All that said, I guess the age limit for drawing funds at 55 is also not sacrosanct and we may expect that to be moved up by successive governments as life expectancy increases…

  • 6X

    Surely the sensible think is to use both ISAs and a pension. As you get older, when you need to, draw on your ISA and other savings first and leave your pension intact for as long as possible.
    Remember, when you start taking your pension – i.e. from the day you take the 25% tax free, if you then die HMRC would take 55% of what’s remaining. But if your pension is still intact when you die, they will not take anything and the entire pot would go into your estate.