Minister acknowledges “pension freedom day” risk

6th April has been dubbed “pension freedom day”. It signals the time when millions of people will get access to their pensions savings, freeing them of financial restrictions. Meanwhile, pensions minister Steve Webb has acknowledged that the pension reforms are a calculated risk. Webb is overseeing the biggest shake-up in pensions for decades.

Freedom to invest

Before jumping to unnecessary conclusions, it’s essential to understand what these pension freedoms will allow. Essentially, anybody over the age of 55 will be able to draw from their pensions at whatever rate they so desire – without restriction.

The aim is to enable greater flexibility, but it places more responsibility on the shoulders of pension holders, enabling them to make the most of their pension investment. This step is commonly sited as being the largest change to the old-age pension since it was introduced in 1908.

Greater freedom, greater financial responsibility

While it might seem that greater financial flexibility is a good thing, it’s also certainly the case that it will give people the power to make both good and bad financial decisions. The risk is, some people might leave themselves short in old age.

Steve Webb acknowledged that the plan does come with some risk, but that the risk was worth the rewards: “We wouldn’t be doing it if we thought it was a disaster, but you do take a risk when you trust people with their own money,” he says. “Paternalism feels safer, but look where paternalism got us. It got us mandatory annuities and a lot of dissatisfied people. Of course you take a chance when you set people free but, as a liberal, that’s why I’m in politics.”

Unrealistic expectations

According to one study prepared by insurance company Zurich, the average retirement length is 25 years. Unfortunately, however, half the population believes that they will only be retired for 20 years – a 5-year shortfall. This could lead them to spend their pensions too quickly, as half of the people retiring now might live to 90+.

Steve Webb believes that this isn’t necessarily a bad thing. In fact, he has stated that it might be the best course of action: “I question this notion that spending all of a given pension pot before you die is inherently wrong. It may be the right thing, it may even be the best thing, to do.”

Mr. Webb has also attempted to justify the short time scale allocated to the pension providers to prepare for the coming changes by suggesting it would facilitate “huge swell of something like half a million people desperate to do something with their money”. This would be detrimental to the pension companies’ balances and have massive ramifications.

However, Webb believes that proper financial education is the way forward. The new proposals are a way to put more power in the hands of pension holders, but it’s up to them to decide how to use it.

At GPFM, we’re here to deliver sensible financial advice on how to make the most of your investments. If you would like to know more about how we can help you with the 6th April pension reforms, please contact us today.

This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.