Budget Comment: Alan Steel, Personal finance

Beware the new pensions promises – and think before you leap

Alan SteelEconomists, it is said, see things happening in practice but say but they wouldn’t work in theory. Politicians follow this mantra inversely judging by the mess UK governments have made over many years to pension planning.

Not satisfied with making 565 changes to pension laws since 1987 , of which 87% were made in only the last 15 years , now they embrace the theory that “ freedom “ is good for individual pension savers when practice suggests a colossal mis-selling scandal looms large , probably even greater than that following other freedoms after the 1988 changes .

In theory, the power to remove as much of the pension fund you want after age 55 sounds great but in practice you’ll probably find an unwelcome and surprise large tax bill the following year and a bare cupboard, having blown the lot on having fun.

What won’t be fun is explaining this to the tax authorities who are skilled at getting blood out of a stone . And neither will it be fun facing up to the probable increased chances of living near the poverty line in retirement.

Now it’s proposed to allow folks to sell their annuities for cash ..taxable naturally … and you have to ask who in practice will pay top dollar for an income plan you don’t want , and where the income is likely to disappear when you pop your clogs ( on the basis most annuities are purchased with only a five year guarantee, no inflation linking and no marriage survivor’s income benefit ). And if you don’t understand that you shouldn’t allow theory to trump practice. Find out first before doing anything daft.

What’s even more worrying though is evidence that savers still grossly underestimate how much they need to accumulate before retirement . A study in the US found in 2013 that 4 in 5 households have less than one year’s income saved up for any rainy day , and even scarier is the fact that over 9 out of 10 folk in the 55 to 64 age group have under 4 times their annual income saved up as they approach retirement. Why? Because research has found in practice you need to have saved at least 22 times your annual income to enjoy a decent retirement financially.

It’s interesting to note that the vast majority who support the UK Government “pensions freedoms “ in theory are politicians looking for higher taxes and the media who can effectively give advice without qualifications, experience, significant savings themselves or responsibility to pick up the pieces when in practice the public will likely make massive financial mistakes too late in life to repair the damage. Mark my words. Keep these thoughts and let’s review this again in practice a few years down the line.

Alan Steel is chairman of Alan Steel Asset Management

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