20 March 2014
People can be trusted to manage their own pensions, but there will be horror stories
True story. Twenty years ago, a 90 year old man who lived across the street from my parents in law in Texas, blew his brains out after spending the last penny of his pension savings. The incident has haunted my father in law ever since, who in spite of earning a modest income throughout his career, has now amassed a considerable pension pot as he starts he starts his retirement. And even now, with pension savings that must leave him in the top 10% or 20%, he worries that his pot may still not be enough if he and his wife need long-term care or fall into seriously ill health.
In the US, there are no laws telling you what to do with your pension savings when you reach retirement. Worse still, the welfare state is not nearly as generous as ours is here in the UK - so for those who do end up with no private savings, it's a tough life. But in the states, people understand the deal much better. If you don't save for your retirement, or at least have children who can look after you, the last years of your life will be about counting the pennies, rather than cruises and days on the golf course. In Britain, many people still don't think seriously about saving for a pension until they're into their 40s - about 20 years too late.
While George Osborne's changes to the pension system, announced in yesterday's Budget, have come in for some criticism, I think they're the right thing to do. By giving people more choice, and also helping them to make the right decisions by providing free financial advice at retirement, we will hopefully build a more financially literate and responsible society.
There will be blood
There will of course be the horror stories - maybe not as extreme as my father-in-law's neighbour - but nevertheless, people who squander what they have saved, and end up with nothing but the state pension to rely on. But with the reformed state pension, which will provide just about enough to live on, no one should be left destitute.
When compulsory annuity purchase laws were first introduced, the state pension was not enough to live on, and many people didn't qualify for it. By forcing people to turn their pension savings into a steady income, the government was trying to lessen the odds of people ever being left with nothing but state support to rely on. Things are different now, and with the introduction of auto-enrolment, many more people will reach retirement with modest savings pots, and will have a choice about what to do with them.
Yesterday's set of announcements from the Chancellor were another important step towards the creation of a savings culture in the UK that has been lacking for too long.