20th March 2014 by The Harried House Hunter
If you are a savvy investor or saver, then the Budget was fantastic news. You can even, if you still wish, buy an annuity, though predictions this morning from Barclays suggest that the market may well decline by two thirds in the next 18 months.
With a radical shakeup in how much money you can release from your pension – just about all of it in many cases – huge reductions in the tax payable to do so, cuts to the amount of income you have to have to benefit from flexible drawdown and increases in the amount you can take out from capped drawdown, this is a huge boost to those who want maximum control over their money.
There is a boost for those who want to secure a safe as houses return with new bonds from N&SI and a effectively a tax cut on savings. The ISA changes also offer huge flexibility in terms of financial planning, though actually with the pension changes, one of the objections to putting money away in a pension has been addressed.
So if you have a strong idea of what you want to do with your money, then this Budget is for you. If you have a strong relationship with a financial planner this Budget is also for you because this offers them much more flexibility in their advice.
For those less certain, one has to ask is it a liberalisation too far? Over thirty years, a lot of pension reforms from governments in the blue corner and in the red, have led to unfortunate consequences whether outright misselling or the running down of defined benefit schemes.
Annuities, for all the poor value they offer, do offer a guaranteed lifetime income. Some insurers may have abused their position by offering poor rates and crucially in other cases by not bothering to find out if some of their customers might have qualified for an enhanced annuity due to ill health. Yet once again it was the savvy saver and investor who would at least shop around. A lot of people who now have more freedom, actually didn’t use the freedom they already had.
So our concern is not, we think, for most readers of Mindful Money. It is for others less savvy. For them, there is not enough guidance to go round. There certainly aren’t enough financial advisers, new simplified guidance is still to get off the ground, and even the Money Advice Service gets five out of ten at best and has, we think been more geared to dealing with debt.
We also think that a lot of pension money will find its way into property – perhaps good for the individuals maybe not so good for a balanced economy or first time buyers. This could be a huge boost for buy-to-let. It could see people trapped in interest only mortgages devoting most of their pension savings to buying their house outright. On some counts, this isn’t such a terrible idea. A mortgage or rent is a huge cost and burden on anyone’s pension savings. Owning your home is much better. Yet many of these decisions will be marginal. Some people will want help with these decisions. It will cost significantly more than the £20 million, the Chancellor has set aside.
Separately, the case for taking an enhanced annuity, in many circumstances, could still be a strong one, but many people will take the cash instead.
Another big risk already pointed out by many experts is that people will run out of cash before they retire. Annuities even if they appear to offer rubbish value do not run out. Indeed it is the best thing about them.
One of the sadder things about the last 24 hours debate or so, is the mostly uncritical welcome given to the initiatives by those who stand to benefit, the mostly dire warnings from those who stand to lose.
The optimal answer may be somewhere in between. But as we say if you are confident about what you are doing to manage your money, this is only good news.