Last week in the budget, George Osborne revolutionised at a stroke the way that pensions work.
The reforms don’t affect defined benefit schemes, where the pension is a specific guaranteed annual amount; only defined contribution schemes, where the employers and employees’ contributions create a pot of savings which at retirement can be used to buy a pension annuity.
But with our very low interest rates annuities return a very low income at present.
So we’re changing the rules to let people keep the money in the pot and draw it down as and when they need it.
People were facing a punishing tax rate if they took more than they ‘should’ from a pension pot, and there was no choice about having to buy into annuities which barely cover their living costs.
It is possible, for instance, for someone who has managed to save £400,000 to gain only £15,000 a year from it in income, and this is plainly wrong on so many levels.
As we all struggle to reduce the deficit, cut wasteful expenditure and do things in government in a way which is leaner and fitter, some of the unintended victims of keeping interest rates low have been the savers and pensioners.
The historic reason why people have had to cap the amount they could take out of a pension tax free was to prevent them from spending too much at once and end up relying on the state.
I’ve always wanted government to give people more freedom of choice wherever possible; in short, to ‘trust the people’.
I think it is right to trust people to make their own decisions about managing their finances, and this is an important recognition of the trap that pensioners and savers have found themselves to be in – and a real attempt to release them from it.
This is new territory, and a number of industries will have to sharpen up their practices and offer genuine good advice and services – classic supply-side reform, and we should welcome that redress of the balance which has been massively in favour of the annuities industry.
This is all about fairness, and about people being able to decide whether to reduce their debt, take more income, spend a lump sum on another investment, give an early inheritance or just stick with the default choice to buy an annuity.
It recognises that people’s circumstances are all different, and that is a very important part of the relationship between government and individuals.