On 6 April 2015 a much-heralded law came into effect introducing ‘pension liberalisation’. Under standard private pension schemes, a worker and their employer pay regular sums to an insurance company throughout the worker’s employment, building up a ‘pension pot’. On the worker’s retirement, this pot is used to purchase an annuity to produce a regular income throughout the worker’s life in retirement.
Now these pension pots are to be equated to normal savings that can be spent anyhow and at any time, provided the worker to whom they belong is aged 55 or more. Theoretically pensioners are now ‘free’ to transfer their pensions savings to more competitive and/or flexible providers so as to improve their income on retirement, and even take all or part of their money before retirement. The reality, however, for many of them will be that their money will soon be gone and they will become entirely dependent on an increasingly stingy state pension. The state pension in 1979 was 26% of average earnings; today it is a mere 18%. It certainly does not cover the cost of living in a care home in one’s old age, or even the cost of having a modicum of care provided in one’s own home.
The Daily Mail of 5 April 2015 (Louise Eccles, ‘Pensions shake-up shambles’) cites the experience of similar pensions liberalisation in the US:
“A respected American think-tank has warned that Britain is about to make the same mistake as the US with pension freedoms.
“The AARP Public Policy Institute said the situation in the US showed that people could not be trusted to spend their own retirement savings wisely.
“Academics said many Britons would blow their savings and be left penniless, forced to rely on the State.
“The AARP’s David John said that in the US many spent ‘unwisely’, took bad financial advice or made mistakes and outlived their savings.
” Age UK has called for more safeguards after the charity’s analysis found someone on a typical pension pot who withdraws £3,000 a year from 65 will run out of money at 75.”
While the American think-tank feels that people can’t be trusted to spend their retirement savings wisely, the fact is that, on the one hand, people experiencing financial difficulties can hardly be called ‘unwise’ if they fail to save; and, on the other hand, there are many sharks out there eying the liberated pension pots with a view to their own benefit, and the workers who have access to these ‘liberated’ funds cannot be blamed if they do not have investment expertise, especially at a time when many people who do have such expertise have had their fingers burnt through what, after the event, proved to be a losing bet. The first of the sharks is the Inland Revenue. Workers will be able to take out 25% of their pension pots free of tax. Anything they take out for spending rather than re-investing over and above that amount will be taxed as income! Furthermore, it will in the first instance be taxed by deduction at source at the highest rate of tax, even in the case of people who pay little or no tax, unless the individual in question is unemployed and can produce a P45 showing a lower tax code. Ultimately, those who do not earn enough to pay tax at higher rates will be entitled to receive back their overpaid tax, but either they will have to wait to the end of the tax year or they will have to fill in a complicated claim form to submit to the Inland Revenue to receive their refund early.
Capitalism specialises in inculcating in people ‘needs’ for spending money on capitalist commodities. Mesmerised by seductive advertising, there are people who will raid their pension pots to pay for lavish weddings for their children, round-the-world trips and other luxuries that are beyond their income bracket. While they might in all probability be condemning themselves to a bleak old age, it is quite understandable that they don’t want to deprive themselves when they consider that they may not live long enough to enjoy a long retirement anyway.
Some insurance companies have a right to charge a very large commission should workers whose entitlement is with them wish to move to a company that offers a better deal.
Besides the ‘legitimate’ sharks, fraudsters have been anticipating a field day with pension liberalisation. According to the Daily Mail, companies have been compiling databases of people likely to have access to pension pots and selling these databases to virtually anybody prepared to pay the price demanded. Apparently a good way of getting people to divulge their financial details is to offer them a low-cost will-making service, or to promise donations to charity in return for the giving of personal information. Those who divulge this information in all innocence are likely then to find themselves targeted for innumerable offers they ‘can’t refuse’ – in particular high return unregulated investments that stand a high risk of failing.
Yet according to the Treasury, ” Our radical reforms are about giving people more choice when they retire – the government believes that people who have worked hard and saved all their lives should have the freedom to decide how to use their savings and the guidance to help them make good decisions .” (Quoted by Josephine Cumbo, ‘”UK pension reform ‘potentially dangerous”‘, Financial Times, 20 February, 2015).
So workers with pension pots are to be entitled to free advice ‘to help them make good decisions’. So committed is the government to making sure good advice is available that it has set up advice centres all over the UK. But Louise Eccles tells us (op.cit): ” The Government had said that everyone over the age of 55 who wanted to take part in the new pension freedoms would be given a free half-hour session of guidance through a new service called Pension Wise, offered through Citizens Advice and The Pensions Advisory Service .” However, only 294 people have been provided to advise 2.1 million over 55s entitled to cash in their pensions under the new provisions – 1 adviser to 7,000 people! Even the most optimistic government claims put the number of these half-hour advice sessions available in the next 12 months at 400,000 altogether, so that there would be a 5-year wait before the last pensioner was seen if everybody entitled to advice were to actually take up the offer. As it is, the government confidently predicts that most people won’t take up the offer of advice, and will either do nothing or will spend their unexpected bonanza without the benefit of any impartial advice at all.
It is the sheerest lunacy in the modern world to make workers make their own provision for income on retirement. The state pension should be sufficient, paid for from taxes – i.e., the annual distribution by central government of the surplus produced by the working class over and above what is needed to replace and improve the means of production, including providing for their own needs. Under capitalism the lion’s share of this is taken by the billionaires for whose benefit the capitalist economy is run, and much of it ends up in gambling on various types of investment that undermines the security of all investments, including the savings of retirees. Under socialism all of it is available to benefit those who need it, including retirees, and all other people in society unable to work.