The budget proposals to free up pension pots. Right or wrong?

Jen I don't know when you retired, but I tend to the view that it was Gordon Brown who reduced the value of my pension pot, rather than Legal & General

I do know that, Jane. I am speaking from experience, where I had not enough in my pension pot and took it as trivial commutation nearly five years ago. It was in Legal anf General, and they managed to reduce the value of my pension pot by 50% in the last five years before I retired.
The same was happening to my husband's which was run by Rothschild's, so we put his into an environmantally friendly one, in the belief that we'd rather they lost it than Rothschild. As it was, in the last five years his went up substantially, even surprising the financial adviser.

jen If someone works for 40 years, and the government has put in 25% of the value of the pot through tax relief, and you take into account the rise in the value of equities over that time, then they do not have to have saved very much each month to have £30K in a pension pot.

Looking at it another way, if you bought an annuity for £30K, you would probably be looking at an income of £1 -2K a year from it, at the most.

It's always been possible to take small pension pots as cash. It's called trivial commutation. I think it's now anything up to £18000, but going up to £30000 from tomorrow.
Nice to know that £30000 is considered trivial by the govt. It's more than the average person earns in a year.
However, you do have to pay tax on it, apart from 25%.

I had to take an annuity a couple of years ago. Annoying. However, I wonder what sort of return you would get buying the max. Premium Bonds over say 15 years, compared to a monthly income. Of course there is always the chance of a big win and you still have the capital.
I have a reasonable amount of PBs, but would need a multiple basic win every month to match the Annuity. X

Granny, it had to be converted into an annuity alongside my pension and I have always paid tax on it as well. A very small amount each month reduced even further.

Rose- I had a very small AVC ( about 10k) - I took the maximum at the time (2k) and from the rest get about £63 a month ( after tax). When I started the AVC I thought the returns would be better but it was my choice and I could just have saved the money ( out of taxed income) and paid tax on the interest over the years. It would be interesting to do the sums and see what would have been best- but that's always the gamble with any form of investment. I hasten to add that I have two occupational pensions plus state that keep me going!

Sorry - a bit long!

I feel really conflicted on this. Money put into pensions gets tax relief, and for the better paid, at 40%. If we want pensions just to become another form of investment, then I'm struggling as to why they should have favourable tax treatment over other forms of investment and savings that are used to create income after retirement. I know tax will be payable on part of the released pension pot but i dont know if the 40% rate will apply if that was benefitted from during its building up (IYSWIM). There are two fundementally issues it seems to me - firstly, a government had to have tax revenues and whenever tax is not payable ( pension contributions, inheritance etc) then the tax has to come from elsewhere and/or government expenditure has to be reduced. So we should have a coherent policy on savings, investment and tax relief for retirement and I don't think we do. And secondly, the whole issue, even more difficult , about decent incomes in retirement and the funding of that and social care in old age

That's precisely it, janeainsworth. I had an AVC pot of just £15,000 when I had to retire unexpectedly early. At the time it would have been very welcome to pay off towards the mortgage but I had to buy an annuity with it. Had I wanted to invest it, the rate would not have been much less in an ISA or I could have taken my chances with Premium Bonds. I am sure I could have coped with that amount without the 'help' of a financial adviser. And I would still have my cash had I done so.
It will take over 15 years just to get my money back without interest.

Jess I think it will benefit smaller pots too. I had a private pension pot of about 100k with which I bought an annuity a coule of years ago.
If the new rules had been in place, I could have put the money into income-generating stocks and shares.
Granted dividends would have been less than what the annuity pays, but when I died, the money would have been part of my estate for my kids and grandkids, whereas the annuity will revert to Legal and General.

This change is going to be of benefit to the fairly well off people who are going to accumulate a pension pot of several hundred thousand.
Perhaps where the annuity market would suffer is re smaller pots. I have one that is never going to generate a significant income. Better to pay off a bit more mortgage. If the mortgage was paid off I might well do something like buy a new car. These smaller amounts will no longer be corralled into annuities.

www.theguardian.com/business/economics-blog/2014/mar/24/george-osborne-pensions-overhaul-little-left-rainy-days

I am happy to go along with the views of Andrew Goodsell, SAGA, Adrian Grace, CEO of AEGON U.K, Peter Vicary-Smith, CEO, WHICH and Dr. Ros Altmann.

All of them have put their name to a letter printed in the Daily Mail in total agreement that the measures the Chancellor announced in the Budget are good proposals for pension and saving schemes alike.

I am sure they know a lot more than I do about personal finance! It has cemented in my mind, my gut feeling the Budget was a reasonable one, as far as Budgets can ever be classed in such simplistic terms given they are quite complicating in places for the ordinary person to understand.

Or is the important thing perhaps that people should be able to invest in a pension scheme that will be reliable, trustworthy and well managed - will not have their money creamed off by the companies involved ?

Jess, it is not only the Tories who "are being a bit pompous about trusting people to handle their own money" the Labour Party are in agreement with this scheme.

Those with final salary schemes are certainly better off and it would not be in their own interest to take a lump sum but I believe it is proposed that those who know they have a life limiting illness will be given that option.

Is the point whether people have the choice to do as they wish with their own money regardless of whether "have the financial acumen of a banana" or not?

I only said "most of us" charleygirl

JessM I do not have the financial acumen of a banana, I think that I am financially astute!

www.theguardian.com/money/2014/mar/22/pension-reform-threat-social-care

janeainsworth it is not a question of whether or not you are enrolled in a scheme, it is about what you do with the pension pot when you retire. Until now you had no option other than to buy an annuity, now you have lots of options. It is simply that the existence of all the other options means that fewer people will buy annuities and that will make the annuities this smaller group buy worth less.

Yes, annuity rates are based on an assessment of individual potential life expectancy but, currently, that is within a large group of annuants where the probability that the actual expectancy of the fund as a whole will mirror general population trends is high. Once the number of people within a fund falls, the probability that the members as a whole will mirror the general population closely is less sure, so in a large fund the smoker with a higher level annuity who lives to 100 is likely to be balanced by a hearty healthy person who falls under a bus three years after retiring, in a smaller fund there is a greater chance that the fund could have a profile skewed towards longevity - or indeed, truncated lives, but the first option is expensive and annuity rates have to protect the provider from going bust.

Jess you've reminded me of a sketch on Smack the Pony when Sally Phillips and Co's eyes gradually glazed over in the presence of their very sexy financial advisor

Just have fewer companies cashing in on annuities might be an idea. A lot of creaming off is happening at the moment.
Those working in the public sector with final salary schemes don't have a pension pot. They have an index linked pension backed by HMG. And very lucky they are to have it - particularly those working in reasonably paid jobs. (I know that many are not - but teachers etc are)
So it would be nonsense for them to say they should have their money. And the chancellor is hoping for a nice little tax windfall - not thousands of public sector workers all wanting a big cash payout.
A group that might benefit are people who know they have a life limiting illness - but most people in their 60s do not, and apparently we tend to underestimate the amount of time we have left.
I think people , sorry the tories, are being a bit pompous about trusting people to handle their own money. To be honest most of us have the financial acumen of a banana. I know my eyes glaze over and my brain goes a-wandering whenever our financial advisor appears. I just sit there thinking "hasn't he got a lovely Cardiff accent" and "I wish we'd never sold that house we had..."

I thought though that with annuities, it's not averaged out over everyone in the scheme but that certain factors influence what the annual amount is. So two people can have identical size pots but get different amounts based on their chances of how long they'll live eg a female will get less than a male all else being equal and a smoker more than a non- smoker. Annuities in the future will be more attractive to people who think they will live longer and so the overall rates would come down.

But there would still be a tax incentive to save within a pension scheme wouldn't there, Flickety, and if it was one of the new auto-enrolment pensions that are coming in next month, the employer has to make a contribution as well, I think.

As the Observer, I think, pointed out today, the new system is going to make annuities even worse value than before.

Annuities work on having a large number of people buying them so that returns are averaged over those who die young/live to 110. The more people buying them the less the variation in expected death rates so the more robust the results of the actuarial calculations required to work out what rate to offer.

If the number of people investing in annuities falls, the number of people in any companies annuity pool will be much smaller and the range of life expectancies is much less easy to calculate so the actuaries have to allow for more people in the group living longer than expected, so the return offered has to allow a bigger safety margin and the rates offered will drop.

This is bad news for those who live the longest - a long retirement, but an impoverished one.