From 6 April, anyone aged 55 or over can cash in their entire pension, sparking fears of a buy-to-let property bubble
It is the biggest revolution to hit British personal finances in decades, with anyone aged 55 or over now able to cash in their pension and spend it on a sports car, invest in buy-to-let property, or put the money in the bank. But even as some major providers marked the occasion by opening for business on Easter Monday, many pension firms and employers have echoed the government’s caution with their own warning that they are not ready for the changes.
In the face of claims that the new rules have been introduced at “reckless” speed, pensions minister Steve Webb, who said last year that people could invest their post-work nest egg in a luxury vehicle if they wished, conceded that there is a case for delaying spending decisions.
“There is nothing magical about 6 April,” he told the Guardian. “I think there is a case for waiting and seeing if you can. You don’t have to rush this. Wait and see what products become available. If you are in a position not to make a decision [about your money] on 6 April, I suggest you don’t.”
For years those retiring at the end of their working lives were effectively forced to hand over their accumulated pension pot to a big pension company to buy an annuity – which in return would pay a set monthly income until death. About 400,000 people spent £12bn last year buying annuities.
But from pensions freedom day – as 6 April has been dubbed – most consumers can cash in their pension pot for the first time, and spend or invest it as they see fit.
About half the UK’s largest pension companies, including Scottish Widows and Aviva, opened in the morning in order to field calls from customers hoping to spend their pots as soon as possible. Approximately 20% of pension customers are eligible to cash in funds. Scottish Widows said it had recruited 400 extra people to help deal with future pension freedom enquiries.
However, only about half of the providers surveyed by the Guardian said they were ready to act on customer requests and to hand over cash. That follows an admission by ministers, who have been accused of rushing through the new pension freedoms before next month’s election, that many pension firms and employers are not ready for the changes.
The three government-backed “guidance” services that are supposed to aid those looking to cash in their pension pots cannot currently be promoted publicly for fear of breaking strict pre-election rules.
Webb, speaking to the BBC’s Today programme on Monday, played down fears that 2 million people could rush to access government guidance – with only 300 advisers available. He suggested on BBC Radio 4’s Today programme that the number was more likely to be several hundred thousand.
He said 6 April is the “starting gun” not a deadline, and insisted the government was “confident” adequate capacity was in place. He added that the Department for Work and Pensions had trained more than 300 staff and Citizens Advice and the Pensions Advisory Service have also been training people.
Asked if he regretted his Lamborghini comment, he replied: “If you are that person with that large pension pot, you will pay a hell of a lot of tax. But it does summarise the fact we are setting people free.”
The Association of British Insurers, which represents the big pension firms, has warned consumers not to “panic or rush into making decisions” and to be on their guard.
Last week it emerged that fraudsters and scam operators had begun cold-calling possible retirees in a bid to grab some of the billions of pounds that Britons currently invest in annuities. Estate agents, car salesmen and even holiday cruise operators are also hoping for a bonanza because some of those cashing in will inevitably go on a spending spree.
Opponents of the scheme have said they fear the changes will fuel a new buy-to-let bubble, as people put their pension pots into property, further pushing homes out the reach of first-time buyers. Meanwhile, some charities have suggested that pensions freedom has all the ingredients of the next big financial mis-selling scandal.
Today’s changes were proposed by the chancellor just 12 months ago. At the time George Osborne said he wanted people to be able to take control of their pension savings, and hand any left unspent over to their families when they died. Despite a great deal of publicity in the financial pages, many ordinary workers are unaware of the changes, even though they affect anyone aged 55 or over – whether they are still working or not. Only those lucky enough to retain a final salary pension – often those working in the public sector – cannot take cash directly out of their pension pot.
However, those taking large sums out of their pension may well incur a hefty tax income bill. The Treasury has predicted that the tax paid by those freeing up cash will amount to £4bn over the next five years.
David Smith, planning director at financial planning firm Tilney Bestinvest, said he expected most people to take a cautious approach. “For all the talk of people stampeding to liquidate their pensions and blowing the funds on luxury holidays or buy-to-let properties, the reality is that most pension schemes will not be able to facilitate the new freedoms on day one. People who have saved diligently across their lives for the moment of retirement do not transform into reckless hedonists at the point of retirement.”
Tom McPhail, head of pensions research at investment firm Hargreaves Lansdown, has previously accused the government of forcing through the changes at “reckless” speed in a clear attempt to make people feel richer before election day. “There’s a pretty transparent political agenda to unlock billions of pounds of pension money just a month before the general election,” he said.
“With such radical and profound reforms as these, under normal circumstances you’d expect to take at least another year before implementing them, in order to make sure all the various players involved were ready. Unfortunately the industry does not have that luxury and as a result many pension providers will be woefully unprepared on 6 April.”
Rachel Reeves, the shadow work and pensions secretary, said the government’s failure to put in place adequate safeguards, risked chaos for savers in April.
“Hundreds of thousands of people are in danger of taking one of the most important decisions of their lives without access to expert financial advice and guidance,” she said.
Ros Altmann, pensions expert and campaigner, told the Today programme that the best advice she could give people today was to do nothing.
“Leave it there ... there are huge tax benefits from having the money in the pension,” she said. “The idea is you can take your money out, not that you should take your money out. There’s no rush.”
She said people would be hit with a “triple tax whammy” if they take their money out – on withdrawal, on the new investment and by the loss of the tax-free status the money had in the first place.
WHAT ARE THE NEW RULES?
■ From 6 April anyone over the age of 55 can take out all of their pension as cash and will no longer have to buy an annuity. It was already possible to avoid annuities but the rules meant that generally only the very wealthy took advantage.■ You will be able to take 25% of your fund tax-free and withdraw as much or as little of the rest of your money as you like. You will be taxed on this at your marginal rate (20%, 40% or 45%) rather than the 55% that you would be subject to prior to the changes.
■ The changes apply to those in defined contribution (DC) pension schemes – sometimes known as money purchase schemes. Those in defined benefit, or final salary schemes, can only take advantage of the freedoms if they transfer to a DC scheme
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