At last Britain's private pension savers will be treated like responsible adults. The rule has long been that, apart from a proportion that can be taken as a lump sum on retirement, pensioners have had to convert their retirement pot into an annuity, paying them a lifetime income. The idea was to ensure that people do indeed have a lifetime income from their (tax-aided) retirement savings, and do not just spend it all at once and then fall on welfare. But as lifetimes have lengthened and financial uncertainty has abounded, annuity rates have fallen, leaving savers much worse off then they expected.
Indeed, pensioners used to be trapped into the annuity rates that happened to prevail on the day they retired, which for some was a disaster if rates had plummeted for some reason. But the current government has already eased that problem by saying that people do not have to convert to an annuity until age 75. And there were rules allowing retirees to 'draw down' some of their pension pot each year, giving them an annual 'income' without having to take out an annuity.
Now, Chancellor George Osborne is giving them greater flexibility still. From April 2015, retirees will be able to access their pension savings pretty much as they wish. Instead of being hit by a 55% tax if they took out 'too much', ordinary rates of tax will apply. So it all becomes much easier. You build up a pension pot while you work; on retirement, you can take 25% of that tax-free (a provision designed to help people with moving costs and other changes on retirement); then you can decide whether you will buy an annuity, draw down the pot at a set rate, or withdraw the whole sum, facing tax only at the prevailing marginal rate.
People of course will need advice on which of these options will be best for them, and the government is making the insurance industry stump up the cost of that. Which does not seem so unfair – it is reasonable that product providers should tell you how best to use their products.
Pensions cause problems for libertarians. Why should a particular form of saving be given special tax treatment, and then hedged around by all sorts of complicated rules, they quite reasonably say. The trouble is that when you have a welfare system, you inevitably are sucked into some such arrangements.
It's not that pensions have a 'favourable tax treatment' exactly. The original concept was that if you were not taking part of your annual income but were 'deferring' taking it until you retired, then it was unreasonable to charge you income tax on the income you had not yet drawn. It would be taxed only when you retired. But then you needed rules to prevent people just spending all this untaxed cash on retirement, then presenting themselves as a charge on welfare – so-called 'double dipping'. And hence the mire of rules.
Most people, though, are perfectly capable of managing their retirement income and do not want to fall back on the state anyway. The new rules recognise that. On the rare occasions when governments treat us like adults, they should be encouraged.