Folly of granting total pension freedom is now becoming all too clear
This is Frank Field’s letter to the FT , published October 28th. In the context of the Work and Pension Select Committee’s current examination of pension freedoms, it needs to be read.
Sir,
It is for the reasons highlighted by Josephine Cumbo that the government needs to reform the pension freedoms regime (“UK retirees using ‘pension freedoms’ for alcohol and gambling”, October 23).
Since the very outset of this debate, when mainstream political opinion was opposed to the idea, I have always been in favour of pension freedoms as an alternative to historically poor annuity deals. The key proviso for which I pushed then and have always done since was a requirement for people before gaining total freedom to have sufficient capital to prevent them falling back on welfare.
The coalition government opted for total freedom without this proviso and we are now beginning to see the results — people are spending all of their savings.These citizens are having their cake and eating it. As well as being offered tax breaks to build up their pension capital, people are also able to fall back on welfare once they have spent their savings.
Clearly the government will need to revisit this aspect of what remains overall an attractive policy, to prevent the possibility of taxpayers coming to think they are getting a raw deal.
Frank Field MP, Labour, Birkenhead,House of Commons, UK
I have three thoughts;
I think it unlikely that Frank Field wouldn’t have foreseen “double dipping” as a consequence of pension freedoms – it is an easy moral hazard to understand – it needs only common sense.
It is sensible (of him) not to throw the baby out with the bathwater, we need to retain pension freedoms while building a framework that makes it easy for ordinary people to retain a wage for life from their pension savings.
The letter looks positioned and – significantly – Frank Field signs off as a Labour MP. I am quite sure that this letter will receive support from all quarters of the House of Commons but particular approval from the Labour party, which is the only party currently looking at how we can spend (as well as save) our pension savings.
I had the pleasure of working alongside Frank Field many years ago on one of his thought leadership groups.
You will note he signs off as Birkenhead MP. Back then, and I’m sure it’s still the case now, a lot of his marvellous thoughts came from taking time every week to spend it with the ordinary people of Birkenhead. He has one if the best understandings of how ordinary people live their lives that you can find in Westminster or Whitehall.
Adrian
Henry
I think that pensions “freedoms” were completely misconceived. About the only positive that can be advanced was that their exercise recaptured some of the tax concessions that were originally offered to incentivise us to provide ourselves with an income in retirement. We do not need to tinker at the edges, we need to go back to arrangements which which annuitise or allow for decumulation in a constrained manner.
Con
I think it’s a fine balancing act. The current drive is to get everyone to actually save for a pension. If your pension savings are likely to amount to purchase of a diddly-squat annuity then what is the point of having a pension at all? A sum of money that might buy a minuscule annuity might still be sufficient to replace the glazing when you retire to reduce your heating bills in retirement. But if you haven’t saved at all, then you don’t even have that. If the pension freedoms were removed now you might find that pulls the rug out from under automatic-enrolment – a process that whilst having made an excellent start, still has a long way to go to make pension saving the norm for everyone.
Frank Field is totally correct as always. Pensions freedoms is and was always designed as a tax raising idea on the back of George Osborne’s fag packet. The UK bought them in at the same time as the Australians were cancelling them due to the number of “boatees” who simply blow their pension funds and then throw themselves back on the state. Scrapping it won’t impact auto enrolment but it will reduce the income of the scammers.
I am intrigued, and somewhat confused, by this assertion from Mr Field
“As well as being offered tax breaks to build up their pension capital, people are also able to fall back on welfare once they have spent their savings”
For those over the Pension Credit Age, money accessed via Flexibilities (Freedoms) *is* taken in to account, as capital or income, when assessing eligibility to Pension Credit – the primary Welfare Benefit for those over (the female) SPA.
DWP were quick to spot this, in 2015 and issued guidance. You can see it here https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/419053/m-12-15.pdf
I also had sight of similar guidance in relation to eligibility for Housing Benefit and Council Tax Reduction, issued to Local Authorities, back in 2015
I’ve not checked the conditions for eligibility of means-tested of working age benefits, but they surely would be similar, if not the same? It would be incongruous if they were not.
I challenge Mr Field to explain the Welfare Benefits available to those who’ve accessed their pot via Flexibilities.
I do hope his claim is genuine and not simply a lame attempt at Political Peacocking
If I am not mistaken, it was only 5 cases that were identified as using freedoms for ‘alcohol and gambling’. Is that enough to draw any meaningful conclusions from? After all, one hot day does not make a summer…
Notwithstanding, when these 5 people were earning an income through employment, would anyone like to take a wager what a significant proportion of their income was spent on? Or indeed, if they took their retirement savings as income, what they might spend that on?
Whatever ‘shape’ we or the government put around decumulation, we need a solution that works for most of the people most of the time, accepting there will always be fringe cases that can’t be solved by the requirement for a one size fits all approach.
Going way back I always thought the purpose of giving tax relief on pension contributions (both individual and employer) was to ensure the individual had sufficient annual INCOME in retirement to minimise the calls on (means tested) social security benefits and social care in later life.
While I believe the requirement to purchase an annuity was onerous, drawdown could still fit within this model provided the amount drawn down in one particular year was limited (say to x% of the pension fund at the start of the year).
Frank Field hasn’t suggested anything that isn’t patently obvious. As others have noted, George Osborne’s motives for introducing Freedom and Choice were everything to do with raising tax revenues and nothing to do with providing better decumulation options for DC members. We should reserve the right to be suspicious with the Treasury intervenes in making pensions policy.
It would be absolutely right to return to a regime similar to that which existed before 2015. There could be easements for small pots, but we should have a form of capped drawdown and should reinstate the Minimum Income Requirement for anyone opting for FAD or UFPLS. While we’re at it, I see no reason either why registered pension schemes should be used to facilitate intergenerational wealth transfer. That’s not what pension schemes are for.