With Freedom Comes Responsibility

The Chancellor’s decision to scrap the annuity rules for pensions seems to have been met with almost universal acclaim.   Allowing folk freedom to do what they like with their carefully saved “pension pot” is probably only fair and long overdue – at least that is the line most commentators are taking.     The rules requiring an annuity to be purchased with the pension pot had been watered down a bit and were seen as unreasonable – and certainly were becoming increasingly unpopular as annuity rates dropped.  Why should the “Nanny state” rule on what you can do with your own money? But in the midst of all this rejoicing – perhaps a note of caution should be sounded.  The requirement to buy an annuity with part of someone’s pension pot did at least ensure that the pension did what it was intended to do – provide an income for that person until they died, and often an income for a surviving spouse as well. In future who knows what pension funds will be used for? Probably some will spend excessively with not too much regard for the future.  However even if folk are cautious and careful most people do not have actuarial skills.  Planning and organising finances to cover an indeterminate period of retiral which could be many years long is frankly not going to be easy for many. There is also the vexed question of care costs to consider and the assessment of capital rules.  Currently any capital over £25,250 has to be used to fund residential care.  Capital in the form of a house may be excluded if spouse is living in it but not other funds.  There is nothing in the chancellor’s announcement which suggests a pension pot drawn down and turned into cash would be exempt from a means assessment. Let’s imagine a male worker retires with a pension pot of £75 k which he puts in his bank and takes no financial or legal advice.  Why would he need to take advice with all that money in the bank?  He may feel better off than he’s ever been. Then he has a stroke and has to go into a residential care home. Only a minority of people ever take advice on care costs.   He lives for several years in the care home and his hard won pension pot is demolished by the costs.  When he dies his wife is left with virtually no capital and no continuing income – which she would almost certainly have had on the annuity arrangements usually put in place under the old rules.   For that couple this new freedom, no matter how welcome it is generally, will not have helped.  Of course with proper financial and legal advice that couple could have protected themselves from that unhappy ending.  That is the real message this new freedom brings.  There is no substitute for good financial and legal advice – folk should take it before they retire and prepare sensibly for the future – that is more important than ever now.