This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Tom Stevenson, Investment Director at Fidelity Worldwide Investment ponders the long term effect of the new pension initiatives announced in the Budget.
The naysayers didn’t take long to emerge. After the initially positive reaction to George Osborne’s remaking of the savings landscape, sceptics soon noted that if you give people the freedom to manage their money as they choose they might actually use it.
This means, as Treasury Secretary Danny Alexander admitted on Newsnight, that a small number of people may decide that the best use of their retirement savings is the holiday of a lifetime rather than a secure income for a lifetime.
Under the new rules outlined by the Chancellor at this week’s Budget, that option will for the first time be available. The obligation to buy an annuity and the restrictions on how much can be taken in the form of income draw-down are to be effectively removed.
If you hold a relatively small pension pot of say £30,000, which might realistically pay an income of £1,500 a year or less, say £100 a month, then the temptation to instead go round the world is quite understandable.
But for anyone with significant pensions savings, the reality is that most people won’t blow it. They have done the right thing and saved for their future for a good reason. Not everyone faced with an eat all you want buffet makes themselves sick.
As Mr Osborne said at the end of his Budget speech: it’s your money, you’ve earned it, we trust you to do the right thing with it.
This is a profoundly important moment in my opinion. It is an important recognition of the fact that the best person to decide what you should do with your money is you. I believe it could set us on the road towards an American-style approach to personal financial responsibility.
In the US, most people you talk to have some understanding of the stock market and the role it plays in their own financial future. They have for a long time managed their own money through a so-called 401k account (the name refers to the US tax code and applies to tax-advantaged savings accounts). They are interested in the markets and in financial planning.
Over here, we have long had a different approach to money. Pensions have been a matter for our employers and the Government. Our job was simply to put in the years and then wait for the cheque to arrive. As the Chancellor belatedly acknowledged this week, those days are long gone.
The introduction of auto-enrolment into company pensions was an important part of this process. So too has been the slow death of final salary or defined benefit pensions, unaffordable now to all but a handful of companies. The freedoms announced in the Budget are the final piece in the jigsaw.
So, what next?. The onus is on individuals to learn more about money and how it works. There is a big responsibility too for the Government to ensure that people, especially young people, are given the facts they need to make the right decisions. A proper place for personal finance on the national curriculum is crucial.
Finally, the financial services industry must step up to the plate to provide the guidance people need to make good decisions and achieve good outcomes with their money.
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