When George Ivan (Van) Morrison wrote Who Drove the Red Sports Car in the mid 1960s, it’s not clear what inspired him. Van’s mind is often impenetrable, but it’s unlikely (though I stand to be corrected) that there was an overabundance of red sports cars purring around his native East Belfast at that time.
Less opaque is Chancellor George Osborne’s mind; like all politicians, he wants to win your vote. Next month, following last year’s revolutionary, and popular legislation, will see people begin to “cash in” their DC, or money purchase, pension arrangements. No doubt some will spend it on holidaying, partying, red sports cars, and having a good time; others will squander it and some will do nothing at all.
And now, if the budget follows expectations (and originally proposed by pensions minister Steve Webb), pensioners who have already bought their annuities will, from 2016, have the opportunity to sell their annuity income and be taxed at only their marginal rate.
Many people who currently have annuities will feel that they’ve had poor value from their pension pot, and there might be a willingness now to sell the annuity it purchased. But is that really the best thing to do? Will they really get value for money, second time around having, in some cases, received poor value first time around? They might, but I wouldn’t bet on it. Just like the company who sold the annuity, any company buying an annuity is going to want to make a profit. In these two-horse races there is one winner and one loser; the company’s money’s on Desert Orchid, while the pensioner’s money is on Shaggy, the retired donkey from Blackpool Pleasure Beach.
It is still early days, but this new “freedom” does seem to be full of pitfalls, one of which is to trust people to be financially “sensible”, at least in our supposedly educated eyes. As Van said in a later song (in a William Blake poem, The Price of Experience, put to music), “It is an easy thing to talk of patience to the afflicted, to speak the laws of prudence to the houseless wanderer”. So how do we help to protect people from themselves?
Maybe, when Mr Annuitant is offered £50,000 for his current annuity of say £2,500 a year, he should go to another insurance company and ask what annuity £50,000 would buy him; almost certainly, it won’t come close to the £2,500 he’s already getting. At least, then, Mr Annuitant is making an informed decision, and if he chooses to have the cash-in-hand, for whatever reason, that’s his choice; you can lead a horse to water (or carry it, in Shaggy’s case), but you can’t make it drink.
THIS ARTICLE WAS WRITTEN BY A FORMER MEMBER OF OUR TEAM.