Lamborghini dealers are licking their lips. Lots of lovely lolly will be coming their way when the government's new relaxed rules on pensions come into force next spring, giving people more freedom to do what they want with the money they have saved for retirement.
In political terms, the pension changes are a cute move. The number of new annuities sold by life insurance companies has halved since
So, expect the first three or four months of 2015 to be marked by strong demand for cars, cruises and property as people decide what to do with their nest egg. This will be the period running up to the
Whether the changes are a good idea in the long run is another matter. Many industry insiders think they will prove to be a mistake, although that won't be evident for some time. "It will end in tears but a long time hence," says
The experience of
But it's no real surprise that the chancellor announced what some believe will be the death knell for annuities. Customers hated them, and with good reason, according to a scathing report from the
There are, though, two more reasons why annuities are currently so low. The first is monetary policy since the financial crisis. The Bank of
There is an upside to low rates, pointed out by the Bank's
The second reason annuity rates are low is that we are living longer. Annuities provide a guaranteed income and if the provider thinks we are going to live for 25 years after retirement rather than 15 years, that will affect what they offer. Annuities were not envisaged for people who give up work in their late 50s and live well into their 80s.
It's also worth remembering that only a few lucky people have a million pounds stashed away for their old age. The average pot as measured by the mean is pounds 30,000; measured by the median it is pounds 17,000.
It is not hard to see that, given the freedom, plenty of people will say: "To hell with it, the annuity I will get with my relatively small pot is so small I might as well have a good time now, while I am still young enough to enjoy it. If I run out of money, the state can look after me."
This won't be the case with everybody. Many Britons are worried about the cost of lighting and heating their homes when they retire, and will bridle at the thought of not being able to pay their own way. The desire to spend a pounds 20,000 pension pot in one go may diminish once people realise that they will lose 20% of it straight to the taxman.
In a perfect world, what would happen is that, freed from the compulsion to buy annuities of dubious worth, people would start to save more during their working lives. The financial services industry would live up to its boast that it can innovate to the benefit of customers. This would broaden the range of flexible products available, offering both an income for life and the chance to keep increasing the size of their fund.
Meanwhile, the state would edge up the retirement age in line with rising longevity, and act as the backstop for the relatively small number of people who run out of money.
The chances of this dream scenario materialising seem remote. Auto enrolment has been a sensible initiative, and should help increase national saving. But
A second problem is that the pension changes are likely to exacerbate ingrained weaknesses in the
Instead, the government will continue pushing up the state retirement age into the low 70s so that the burden on taxpayers doesn't become too acute. This may seem reasonable in
So, Groves is almost certainly right. This can only avoid ending in tears if retirees use their pension pots to generate higher incomes than they do currently. It is hard to see how spending it on sports cars, holidays and even buy-to-let homes will do this.
At some point
The experience of
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