On pensions, the government has placed freedom over protection – but will it make us better off?
Many are choosing cash over annuities because they don’t think they will live long enough to get good value from an annuity, even though many would. In short, lots of people are making a financial mistake
The “pushmi-pullyu” in the 1967 film of Doctor Dolittle was a double-headed llama, with one head facing forward and the other back.
Pensions policy in the UK in recent years has borne a resemblance to this contradictory animal.
In 2012 the government introduced a “nudge” to encourage people to save for their retirement.
Rather than relying on workers to sign up to occupational pension schemes, the legal default became that everyone gets enrolled unless they deliberately opt out.
And all companies, above a certain size, also had to offer a scheme.
The result has been a surge in retirement saving, with the number of active pension scheme members up from 8 million in 2012 to 15 million in 2017.
Some criticised it as intrusive paternalism and a red-tape burden on firms. To most, though, what matters is that it worked.
Yet George Osborne introduced a lurch in the opposite direction in 2015.
The former chancellor, out of nowhere, decided that the rules around what people could do with their accumulated pension savings were too restrictive.
“People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances,” declared Osborne.
He gave the over 55s the freedom to cash in their pension pots and to do what they like with the money, scrapping the requirement for them to transform it into an annuity (a contract with an insurance company to give them a guaranteed annual income for life).
But what if they made bad choices? That’s up to them, was the government’s answer.
“If people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice,” chirped the former Liberal Democrat pensions minister Steve Webb.
From paternalism to libertarianism in just three years. From “push me” to “pull you”.
People may not be buying Lamborghinis. And mercifully there’s no evidence thus far that people are frittering their money away, although they don’t seem to be doing much shopping around before putting their money into investment funds which is rather ominous and some are just keeping their money in low interest rate cash savings accounts.
Yet one thing they certainly aren’t doing is buying annuities. At least not in the volumes they used to. The proportion of people who access their pots buying annuities has collapsed from 90 per cent to just 12 per cent.
Why? Well it could be because they want to spend the money on an expensive one-off purchase – such as property – something they couldn’t do if they bought an annuity. Perhaps with annuity rates low by historic standards they think they’ll get better returns from investing their pension pots in stock market funds.
Yet new research from the Institute for Fiscal Studies published last week, based on survey evidence, suggests a big part of the reason is that people are under-estimating their own likely longevity.
They are choosing cash or shares over annuities because they don’t think they will live long enough to get good value from an annuity, even though many would. In simple terms, a great many people seem to be making a financial mistake.
It’s clear how this could be storing up problems for the future: those who run out of pension savings in old age will have to fall back on state support, making life more financially uncomfortable for themselves and also imposing a greater fiscal burden on future taxpayers.
One can see how an ideological battle could be joined over this. The libertarians would fetishise “freedom” while the left would argue people need to be protected from themselves.
Yet people are more complex than the terms of such a squabble allows. Yes, we want the freedom to occasionally make mistakes. But we also grasp that sometimes a more complete autonomy can be found within a framework of guidance, even at times compulsion.
There is a tension between freedom and protection – especially when it comes to financial services, where the consequences of decisions often don’t materialise for many decades.
Should the great pension liberalisation be reversed? Should we embrace push me, rather than pull you?
Whatever the answer to that, one obvious imperative is to start furnishing people with good and accurate evidence on how long they are likely to live for.