I’m writing this in support of the ‘Your Pension, Your Choice’ campaign to allow people in the UK who retired before April 2015 the same ‘pension freedoms’ afforded to retirees after this date.
I suppose I’ll have to do a bit of explaining here; goodness knows that deciding on whether to support this campaign, or not, took me long enough. You know me guys; I always have to make sure that all arguments have been considered and all weight in the balance.
So, let me explain what all this noise is about (and why I’ve decided to support it and urge you to do the same).
What is ‘pension freedoms’?
The change in private pensions that came into force in April 2015, and known as ‘pension freedoms’ means that anyone over the age of 55 can take out their whole pension pot, or part of it, when they want, as they want.
The first 25% of the pension pot can be withdrawn tax-free; the rest is taxed as income (e.g. if the amount withdrawn, added to your income, exceeds £100,000 you’ll start losing your personal allowance and pay tax higher than 40%).
What freedom this really gives you?
The Government dressed this change as ‘freedom and choice in pensions’.
What we need to remember is that this change applies only to defined contribution pension schemes (these are the schemes where you contribute to a pension pot and the money accumulated is eventually used to buy a regular income).
Where ‘freedom’ comes to play is that people can chose pension draw down options rather than being forced to buy annuity (which was compulsory before 2011).
Do we, at The Money Principle, welcome this change?
We have kept ambivalent where the freedom to withdraw your pension is concerned.
On the one hand, this can be beneficial when you:
- Can invest your money nest better than the pension fund;
- Can get higher annual return than the annuity you can buy;
- Don’t expect to live long (there is a family frailty) though assumptions of this kind can never be reliable;
- Are disciplined enough to apply the strict rules of draw down.
There is much anecdotal evidence that most people are not that disciplined. In fact, there have been stories of withdrawals being spent on new cars, house extensions and exotic holidays.
Being very boring, we believe that freedom always comes with great responsibility. Hence, the higher flexibility that the latest pension rules offer ought to be matched by education programmes emphasising the need for income in older age. These programmes should include basic investing strategies and financial responsibility.
The freedom to withdraw your pension savings after the age of 55 should not be taken to support mid-life crises drenched in Dom Perignon and sunshine.
We have kept ambivalent, and neither welcomed nor disputed, these pension changes because we have not figured out ways to match freedom and responsibility.
What is the ‘Your Pension, Your Choice’ campaign?
This campaign is petitioning Government to allow retirees before April 2015 the same freedoms regarding their pension that it allows later retirees.
This campaign claims, and rightly so, that depriving approximately 5 million retirees from the right to cash their pension pots, and locking them in the annuities they had to purchase, is unjust and the situation ought to be remedied.
To mark the start of the campaign, a Change petition has been launched to gather public support, while a cross-party group of MPs led by Scottish Conservative MP, Paul Masterton, have launched an Early Day Motion in Parliament.
Why The Money Principle support the ‘Your Pension, Your Choice’ campaign?
I told you that we are ambivalent about the ‘pension freedoms’ change.
This may be but…
Given that these changes to the pension rules have been introduced, we believe it is wrong to exclude people who retired before April 2015.
This is why we have signed the petition demanding that Government reconsiders their position regarding opening the ‘pension freedoms’ to people who retired before April 2015.