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Pension reforms are vital to encourage saving. But what about everyone else?

23 March 2014

1:16 PM

23 March 2014

1:16 PM

‘This reform is about treating people as adults’ — according to the Pensions Minister Steve Webb. The announcement of a pensions revolution in this week’s budget took everyone by surprise, leading to the question of whether there has been enough consultation on the changes. Webb said on the Sunday Politics today that evidence elsewhere shows the coalition is doing the right thing:

‘We know from around the world – places like America and Australia – where people already have this kind of freedoms. So we already have some things to judge by. We’re going to spend the next year talking to people working it through, including a three-month consultation. There is a lot of detail to be worked out. ‘

According to Challenger Retirement Income, Webb is right about Australia. In a 2012 survey, their research suggested 32 per cent of retirees use pension pots for buying a home, paying for home improvements or paying off a mortgage:

As well as freeing up the market, one of the motivations behind the announcement was to tackle the fall in people saving. As the graph below shows, the amount of money saved by households (known as the savings ratio) has collapsed in recent years:

Webb said he was hopeful the pension changes would reverse this trend:

‘One of the things we know is that the economy is picking up strongly and as people have more confidence about the future, they may be more willing to consume now. So without these measures, it may well be the savings rate would have fallen further.

Clearly we do want people to spend, we want people to save. It’s getting the right balance and I think these measures reward those who save but recognises as the economy picks up will want to spend more of their own money’

But what about the other savers, those who’ve punished by the government’s unusually low interest rates? Webb didn’t deny that savers have been penalised:

‘It’s certain the case that very low interest rates have been a huge boon to people of working age with mortgages. People who are retired have said to us “yes they feel they could have got a better deal…so I think there is a recognition that whilst we’ve done the right thing for pensioners on the state pension — we’ve brought in the triple lock to make that go up at a decent rate each year — certainly pensioners have felt the hit’

He’s certainly right about that. Most pensioners will already have had to buy an annuity and will be locked in to a bad deal. For them, there is no way out. A spokesman for Legal & General is quoted to this effect in today’s Sunday Times, saying annuities “are long-term contracts with no right to surrender.” So actual pensioners who have been forced into these appalling deals have been given nothing by this budget – it’s the yet-to-retire who will be celebrating.

Webb cited the increase in the personal tax allowance as something that will help other savers — although as he tacitly admitted during the interview, the government is preparing another years of ultra low interest rates. So, good luck to anyone finding a Cash ISA that gives you an above zero real return on your savings. Savers are still being screwed, but at least the government feels a but guilty about it. An improvement, of sorts.

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