Pension pots 'can be used to buy Lamborghinis' says minister

Pension pots 'can be used to buy Lamborghinis' says minister
Steve Webb says government doesn't mind if wealthy people near retirement blow savings on sports cars, in budget defence

Affluent people approaching retirement should be free to blow their pension pot on a Lamborghini even if they end up relying on the state for support, the pensions minister says.

Steve Webb said on Thursday, as he defended reforms in the budget, that the government would be "less bothered" how people spend their pension pot. The remarks came after the Institute for Fiscal Studies warned that there would be losers from the loosening of the rules on annuities, announced by George Osborne in the budget.

Webb told the BBC: "One of the reasons we can be more relaxed about how people use their own money – and as a Liberal Democrat I want to give people those sorts of freedoms – is that with the state pension coming in, the state pension takes people above those sorts of means tests.

"So actually, if people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice."

Webb raised the prospect of people in their 50s and 60s splashing out on the Italian sports cars, which can cost over £300,000, amid an intense debate over Osborne's decision to introduce the most far-reaching reform of the taxation of pensions since 1921.

People on money-purchase pension schemes will no longer be forced to take an annuity – the income guaranteed by pension providers in exchange for receiving all or part of the funds in their pension pot. A "punitive" 55% tax rate imposed on anyone who takes out more than a quarter of the savings in their pension pot will also be cut to the marginal rate of tax.

The chancellor believes that the reforms will end the "patronising" view that people cannot be trusted to invest the funds from their pension pot. Labour, which is being careful to avoid Tory accusations that it wants to limit people's choices as they approach retirement, is restricting itself to raising questions about the policy.

But Gregg McClymont, the shadow pensions minister, retweeted a link to a piece on the Public Finance website about "Osborne's pensions catastrophe" by James Lloyd. Lloyd wrote: "In one swoop, budget 2014 destroyed UK pension policy. The chancellor's announcement that individuals will no longer have to buy annuities is possibly the most catastrophically bad policy decision made by this government. It will almost certainly have to be reversed, if it can be."

Paul Johnson, the director of the IFS, warned that the changes could make annuities even more expensive because people who are expected to live longer would be more likely to purchase them. He said: "There are some genuine uncertainties about the effect of the policy. Most importantly it will likely make annuities even more expensive for those who do want to buy them. The market will become much thinner and there will be greater levels of adverse selection – only those expecting to live a long time will want to buy an annuity thereby driving up the price. There is a market failure here. There will be losers from this policy.

"Without wanting to be seen as patronising, it is important to point out that increased choice could lead to more mistakes. People at 60 or 65 are known to underestimate their own life expectancy, and especially the likelihood of living to extreme old age. They may overspend early in retirement."

The warning about the impact on annuities challenged the treasury's view that reforms would improve annuity rates. A Treasury source said after the budget: "It should lead to a more competitive market because at the moment people are forced to buy an annuity. Now companies selling annuities will have to compete for their business against other options. At the same time the Financial Conduct Authority is conducting a market review of the annuities industry so we will see what they have to say."

Tom Watson, the campaigning MP, was one of the few prominent Labour voices to warn of the dangers of the change. In a blog, Watson said that the annuities market evolved as "an early example of the state, the individual and the private sector co-operating to protect one another from the everyday risks that we all face".

Watson added: "What the chancellor announced yesterday fundamentally threatens that deal. It says to the individual – pay into this pot, take the tax breaks and the special protections, then do whatever you want with it later on. It's a one-sided charter for tax avoidance that misunderstands why our carefully constructed mixture of the public and the private works for pensioners and works for the UK as a whole."

http://www.theguardian.com/money/2014/mar/20/pension-pots-used-lamborghinis-minister

And he is right, this is total madness. The annuity market needed reforming, but this is throwing the baby out with the bathwater, only with rather old babies.