14th October 2014
The Chancellor has been accused of being on a “reckless joyride” of reforms, as he told savers they would be able to use their pensions like a bank account, withdrawing as much as they please, from the age of 55.
George Osborne said that workers will be able to withdraw “as much or as little as they want” from their pension pots, in a controversial move that has been welcomed by many, but criticised by others for encouraging people to spend their savings unwisely.
The first 25 per cent withdrawn will remain tax free and subsequently older workers and pensioners will be charged income tax at their normal rate on subsequent deductions.
In the Budget the Government announced that pensioners who have saved in defined contribution schemes would no longer be forced to buy an annuity in order to guarantee an income for life. Those in final salary schemes do not need to buy these insurance products because they already receive a guaranteed income for life.
However, the latest guidance from the Chancellor means that over-55s will be able to dip into their pension funds for small amounts, or for larger items like a holiday or a new car.
Osborne said: “People who have worked and saved all their lives will be able to access as much or as little of their defined contribution pension as they want from next year and pass on their hard-earned pensions to their families tax free.”
He said that for some people converting their savings pot into an annuity would remain the best choice, but that others would prefer to draw down their savings gradually.
Dr Ros Altmann, the Government’s adviser for older people, said it was akin to being able to use your pension like a bank account and that it would be the end of pensioners being forced to buy particular products.
Richard Lloyd, executive director of Which?, the consumer group, said: “The additional flexibilities will be welcome news for people saving in to a pension but the right to quality guidance will now be of greater importance and it will be crucial that all those involved in the reforms work together to put in place a consumer-friendly system.
“Guidance should cover every single one of the available options and take into account all of the individual’s retirement income, savings and investments.”
Others expressed concern that the reforms would lead to people spending all their cash too quickly and having to fall back on their state pension.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said the firm is broadly supportive of the Government’s package of retirement changes, which have the potential to reinvigorate investors’ appetite for long term savings, but that warned that “the Chancellor is also on a reckless joyride of pension reform, it’s exciting but it could well end in the most horrendous retirement income car crash.”
McPhail added:” Millions of pension savers are being encouraged to withdraw their money at will. This is fine as far as it goes, but managing longevity and investment risk is complicated, particularly if you have been defaulted into a pension, you’ve never engaged with it and you don’t know what you’re doing.
“Many professionals struggle to get it right so the idea that at least some inexperienced investors won’t get it wrong is recklessly naïve.”
Towers Watson, the consultants, said the reforms would tempt more people to leave the security of final salary schemes.