The Budget

What's a pension?

I suspect that at the end of the day, the only people who'll be better off will be the usual suspects - not the likes of you and me Jamie.

I would have liked to have seen that smirking Little Lord Fauntleroy commit to abandoning wasteful vanity projects like HS2 and Trident, diverting some of the money to create a West-East hub corridor linking Liverpool, Manchester, Leeds, Sheffield and Hull, thus helping to regenerate the North; a crackdown on tax evasion and avoidance; intervention in the housing market (including the scrapping of the bubble-fuelling RTB scheme and punitive taxation of unoccupied properties, no matter where their owners reside); rent controls; bonuses to be held in escrow; more help for small businesses.

Oh well. Budget day is always a disappointment... should know better really.

That's fantastic news! So one can take the whole lot as cash, 25% tax free and the rest taxed at your earnings rate? Is that right?

"I suspect that at the end of the day, the only people who'll be better off will be the usual suspects - not the likes of you and me Jamie."

Not so Kevin. Honestly, in the close on 27 years I've worked in Financial Services, mainly in showing people how best to organise their money and how to do it properly, this is one of the biggest step changes, one of the best benefits to people saving for retirement I have seen. if not the biggest. This is seismic stuff.

I usually stay clear of the finances debates on the forum 'cos I'm tired of trying to get people to see common sense and most would rather not listen (even though it's a key area where I do usually 'know best') but this is a fundamental change.

Everyone should plan/save/invest for retirement, one way or another. Not everyone does for a heap of reasons, including the fear that it's not affordable.

However, one of the biggest problems with using pension products (by which I mean asset backed, investment based, not company scheme/final salary based products) and has been my chief bugbear since I realised it over two decades ago, was that no matter how well your investment performed, by and large at 'retirement' you pretty much have to convert your pension product fund(s) into an annuity. The rate of annuity (what people call a 'pension') you get is fixed at outset, you can never, ever change your product and that rate is determined by prevailing interest rates/Gilt yields and your personal circumstances, age, health etc. In short it is largely a shite product and has little place in the modern world IMO unless your specific circumstances suit it. There are alternatives but the penalties and restrictions are tricky to say the least

Usually (IMO) it is far more flexible a way to save though a collective based product (OEIC,unit trust, ISA) which is far more flexible and the list of why this is a better product and means to save into for growth and/or income is endless, believe me.

Now, or at least soon, anyone with pension money will no longer be 'trapped' into an income defined by circumstances beyond their control, save the amount invested.

This is huge.

It will make a difference to anyone saving into their own pension fund or one through their employer which is asset backed/invested, defined contribution/money purchase.

Count; correct.

+1 Jamie

I was a pension trustee with a previous company and learned quite a bit. I did not join the pension scheme when I started my present job. Annuities were the worst possible deal and it's hardly surprising that the share price of leading life assurance companies fell like a stone after the news (L&G down 8% etc).

Here's to a better retirement for many ....

Aha, well I actually work for L&G and I suspect our share price will not stay down very long. Yes, we're one of the biggest annuity providers in the UK but on their own, they really aren't that profitable and only work as a business with market share. Beyond the fact that, again IMO, annuities are not good things for many consumers if they have the option!

However, L&G are also one of the biggest pension and investment product manufacturers and providers in the country, we own sh*tloads of property, equity in UK business as well as corporate and government debt and many/most investment adviser firms use our products (chiefly Cofunds). We do a little bit of Insurance too...In short L&G have lots of fingers in many pies.

Unfortunately some businesses who specialise in providing or advising on annuities will suffer, unless they can change or adapt.

But, in short, I am not sorry to see the rules regarding converting pensions to annuities being dropped.

Yes this is the biggest news I've heard from a budget and it directly affects me. 

I would have thought the worst time to retire for decades (ever?) has been in the past 5 years. I feel sorry for people who've saved prudently all their lives only to be offered the appalling annuity rates recently. I've stuck with the personal pension philosophy since I was 23 and if the rules stay as they've  been announced, I'll be very happy.

That was a pleasant surprise for me as well for the reasons so eloquently put by Jamie. Also the changes to the ISA are welcome news. Savers and up and coming pensioners have had a bad time over the last 10 years.

The sting in the tail is paying income tax on the money you withdraw. Can anyone confirm the exact tax position? Is 25% of it free of income tax?

Chaps

The Tories need the grey vote and pensioners are the one group who can be relied on to vote no matter what the weather.

The new rules on ISAs are a definite boost and also the relaxation on annuities will encourage a release of cash into better inverstments such as BTL or equities.

Overall a good budget from a retirees point of view.

Regards

Mick 

What are the alternatives to an annuity?

naimsake, you will be able to take 25% tax free, thereafter any withdrawals are at your normal tax rate for that particular year. You treat it exactly like earnings. You will be able to withdraw any amount you like, anytime you like. If you withdraw an amount which goes over the 40% tax bracket, you'd pay 40% on the amount above this bracket. If you had £80,000 left, you could withdraw £40,000 one year and £40,000 the next, so you only pay 20% per year. There again, you've been given tax relief on all your payments into the pension, so you could say it's all tax free.

Mick, I think this budget is for everyone of all ages. In years to come, I will now be able to buy a Statement with cash and live on baked beans for the rest of my life. You're welcome to pop round for a pot of second stewed tea.   

Rod, wine.

I'm very happy with the changes and believe that most of us have the intelligence to use our pension pots wisely, but I do have major reservations about possible new financial scandals. The financial industry has an appalling record and the vultures will be circling soon. There will be many vulnerable people out there with large pots, just waiting to be "helped" to invest their life savings. Apologies to all the honest financial advisers out there but it will be like shooting fish in a barrel for others.

Do you mean wine as an investment, or just drinking it?

It hasn't proved to be a great investment in recent years. I get asked advice about this the whole time (there are always selective figures to be pulled from the equation, and indeed certain Burgundies, sold in China, may net you several multiples of what you paid for them. But having invested heavily in Bordeaux 2010s would have cost an awful lot). But my advice is always that if you are not prepared, or cannot afford, to drink it, then don't invest in it.

I will need to invest my pension funds (from the sale of property) into something that will allow me to continue drinking lovely, health-giving red wine until well into my dotage.

But, not for a while yet at least

OK, not about to give 'advice' over a forum but...:

Most traditional investment is around the purchase of an asset or assets that you either expect to grow in value (over a time period) and or generate an income. This is normal practice and has been for thousands of years. The wealthy get wealthier by owning stuff, be it land, homes, business(es), people, precious metals, spices...Whatever. Banks/Building societies are a relatively new invention but money lenders have themselves been around a long time. However, historically if you have the money you can invest for profit yourself, rather than letting the bank do it for themselves.

For some people this asset purchase might mean going out and buying a house, sticking a tenant in it and then 'live off' the rent. The asset should appreciate over the long term despite rises and falls in market prices and over time you get to stick the rent up. This should give you growing wealth and a growing income.

Some people might do the same with Tesco shares say and live of the dividends every 6 months and ideally see the value of their share in owningTesco grow too.

There are potential problems though:

1) What do you choose to buy as your asset?

2) Without diversity, you stand or fall by a single choice potentially. If the house falls of a cliff or Tesco collapses, you're stuffed

3)How liquid is it if you need to change things? Can take years to sell a house...

4)Your choice may or may not be a good one today. How about tomorrow? Next week? Nest year etc.?

5) Do you have the wherewithall to physically go out and buy houses?

So; enter investment funds. In the UK there are thousands of them. All divided up into different sectors, investing in different things, e.g. shares, commercial property, Gilts, Bonds, Gold etc. and this may be assets in the UK or around the World. Common theme is that one way or another they largely own 'stuff' and when you add your money to the money already in the fund, which already owns millions or billions of pounds worth of stuff, you get a pro rata share of profit, loss, inc ome etc.

There are many ways to access these funds e.g. though pension products, insurance company bonds, invetsment trusts etc.. More often than not these days investors will perhaps be recommended to use collectives (unit trusts/OEICs) which usually have no set investment term, a large choice of funds, can be tax efficient through the use of annual personal allowances, ISAs etc.

The value of this stuff, your fund price and thereby your investment still rises and falls but with so much diversity it should be less dramatic and whatever the crisis, the world has never stopped turning yet and generally the price of stuff does rise over time...You can invest for quite a stable income too, for example think houses again. House prices might rise and fall but your rent doesn't change every month does it?. The monthly rent is not determined directly by changing house prices

But the 'skill', the 'art' is in which product(s)? Which fund managers? What sort of asset split? What funds? etc. That's where many people need further advice, not only in terms of 'What's an investment?'  but also 'What does good look like?'.

Yes, historically there have been all sorts of issues and I won't go into that because this will get even longer and turn into a rant against the industry and some of its customers...But if you speak to a large, well trusted advice firm (of which there are many, including the one I work for which also happens to be a FS manufacturer and provider), go in with an open mind, spend time getting to know each other, listen to what they have to say after evaluating your circumstances, consider whether their recs. make sense or not (as opposed to saying "I don't like what you're going to suggest to me as best, what else have you got which looks more like a building society account and may give me a whacking great return if I'm lucky because really I'd like to have my cake and eat it and try and get something for nothing..." Which can often lead to doing something hopeless) you should find that, if the adviser is doing their job, their suggestions are just common sense.

If they don't make sense then the adviser hasn't done their job properly and you can walk away. The FS industry doesn't expect their customer base to become expert fund managers themselves on the back of one meeting but these days they should try and educate customers to get a core understanding of how investment works, so that they feel confidant about it and there are fewer surprises to get upset about when things change every now and then. If they think you don't get it, likely as not they should suggest you don't do it .

Now, everyone can take their pension sums and invest in a much more flexible, liquid manner to give themselves growth, income (probably at a level comparable to annuity rates, if not higher), a combination of the two, whatever. And when they die, if they haven't spent their capital instead, it goes to the estate now and the money stays with the family, not the annuity provider! Everyone's happy. Apart from annuity advisers...Oh and long term care costs might eat into it too...

Dont know if he was giving me Bull**** but a friend of mine said he used to run part of L & G,called Gresham insurance. Is that part of your mob ?

Mista H

Bingo and beer. Hooray! Panis et circencis.

Not as far as I'm aware, although as far as mobs ago we're quite a big one.

Thanks for the authoritative answer Jamie.

Can, though, the 'average' person really be trusted with what is probably going to be a very large amount of money, at precisely the stage they are getting more time on their hands? Sounds like a recipe for disaster (for some) to me. 

You may be making a lot of money for an investment company by buying an annuity, but by buying something else on the say-so of a Financial Adviser seems likely - if nothing else - to create a whole lot of very questionable Financial Advisers with an easy target list.

Assuming I still have my marbles then, I will decide whether to sell or keep the house on the basis of a lot of advice at the time. Currently, however, the rent it makes would not be enough for me to live on in retirement (and these two figures seem likely to stay in proportion to one another, how ever much they might change).

TBH, not so different from the monent. Someone can choose whether to invest in an annuity before age 75. Or not. By 75 you have to do something but that could mean what is currently called drawdown but that is so ridiculously complex that few bother...So decisions still have to be made, even now.

And besides, a 'pensioner' should already be using an adviser to look at their (open market) options for them anyway. Most don't. But they should.

From personal experience, I have dealt with thousands (thousands and thousands) of people who have come into money over the years e.g through inheritance, a common theme is that they 'don't want to waste it' when they get it. There will be some who take it and spend it  but those that have bothered to save for their retirement are perhaps the least likely to go out and blow it becuase they've already put the thought and trouble into saving for their retirement in the first place!

And of course they could still buy an annuity if they want, though I suspect the choice will become more limited.

As to advice, well bear in mind that these days it's pretty difficult to be a financial adviser and a financial advice firm in the first place.

What we may see is a number of 'non-advice' firms popping up. There are a number of these already for annuity services and while some are fine, I'm concerned by practices at some others that I've seen in recent years and some of the charges I've seen are hard to justify.

Chaps

Despite all the pros and cons of annuities, the good news is that the budget has given us all more flexibility on how to convert a pension pot into an income that suits individual needs.

The Chancellor deserves some credit for that.

How we exercise this new flexibility is entirely down to each and every one of us and freedom of choice is always a good thing.

Regards

Mick

This freedom of choice as to how people utilise their pension pot does not extend to those who are stuck with defined benefit schemes.

I bet they are keeping very, very quiet.

Hi Don

Yes - a defined benefit scheme is frankly a gift from God. It's the best investment anyone can make.

Mick

On PM [at 5 pm on Radio Four] two Labourites were extolling the virtues of paternalism and telling those less informed [than the Labourites] how to spend what they voluntarily saved for themselves!

Bravo for George Osbourne having the sense to let people to choose for themselves how they spend the hard earned private pension rather than letting Bankers rob them of a decent income from the rigged annuity system, which merely helps pay Banker-bonuses, and all our taxation will at least stop the im-prudent starving before they die. One may assume that anyone able to accumulate a private pension pot will have payed their fair share of tax on income, let alone on purchases, before retirement age ... 

ATB from George

A side show, sometimes known as misdirection, designed to deflect attention from the sad truth that things are not really getting any better. Richard Reich has an compelling view of how austerity is entirely the wrong solution.

Tog