Cashing in pensions: Back to the pirate days
In a way the pension freedoms you hear so much about have taken us back to the old pirate days when some of the first pensions were paid.
The notorious 18th Century Welsh privateer, Black Bart, signed a pirate code promising that crippled members of his crew could leave the ship with a share of the treasure as a pension.
What they did with the booty was up to them. No-one expected them to use it all up buying an annuity. No-one stopped them from giving cash to whoever they chose to give it to.
Similarly, 100 days ago, the chancellor gave current savers the right to do what they wanted with their pension pots once they made landfall on the wrong side of 55 years of age.
Pension changes 2015
- People aged 55 and over can withdraw any amount from a Defined Contribution (DC) scheme, subject to income tax
- Tax changes make it easier to pass pension savings on to descendants
- Many people with Defined Benefits (DB) schemes will be allowed to transfer to DC plans
- All retirees will have access to free guidance from the government's Pension Wise service
- Existing annuity holders unaffected for the time being
Dream holidays and new cars
The move has prompted a wave of interest, with hundreds of thousands a week phoning up to find out more.
Many have discovered that exercising their freedoms is a frustrating process, fraught with delays. But according to the Treasury more than 85,000 people have dipped into their pension plans so far, cashing in £1.3bn.
Are they like the wary ex-pirates who had to hide their treasure chests and keep a low profile, knowing that any carousing would attract the attention of the King's officers? They are not.
These are the ones who have celebrated with a dream holiday or bought a new car or ordered a kitchen extension, although some - more sensibly - have paid off mortgages and other debts.
The average withdrawal is just over £15,000, probably not much different in value to the 800 pieces of eight promised by Black Bart.
Now the insurers who manage pensions have revealed more about the choices being made.
What appears to be happening is that those with small pension pots, of only a few thousand pounds, are rushing to cash them in.
Those with larger pots are more likely to buy an income for their retirement. But there has been a 75% drop in purchases of old-style annuities.
Instead, in the first two months of the freedoms £720m was spent on income drawdown policies, which give you a regular income plus the ability to dip into the underlying cash when you need it.
Some will take that as an encouraging sign that the over-55s are taking more care with substantial pension plans which really could provide an income for life.
Pension freedoms in numbers
- Launched 6 April 2015
- 85,000 cashed in pensions
- £1.3bn cash withdrawn
- £15,300 average cash taken out
- £720m invested in income drawdown
- £69,900 average drawdown pot
- £630m spent on annuities
Source: HM Treasury/ABI
Even so these are shark-infested waters. People have to watch out for high charges and scam merchants. They have to think about tax as well, because the chancellor is entitled to his share of the treasure.
Pension income has always been taxable, but the revenue can be brought forward by decades if people dip into their funds.
The first 25% withdrawn is tax-free, but after that you pay normal income tax. Some who cash in large sums could find they are pushed into the 40% tax bracket.
Pension experts are forecasting that excitement about the reforms will result in a tax windfall for the Treasury this year of hundreds of millions of pounds.
Not to imply, of course, that there is any likeness between George Osborne and Black Bart the pirate, who met his end in 1722 in a skirmish with the Royal Navy.