We welcome the Government’s decision not to proceed with allowing people to cash in their pension fund, and may wonder why taxpayer’s money was ever wasted on this stupid idea in the first place. If you want a pension, then there is no substitute for buying an annuity. We have tried modelling various drawdown schemes on a spreadsheet, but the upshot is that the putative pensioner will always run out of money if he or she lives long enough. It is only the annuity, which is based upon a cross-subsidy from other pensioners who die earlier, which can guarantee a lifelong pension even in extreme old age. Pension contributions get favourable tax treatment because it is in the State’s interest that people do not impoverish themselves in old age, and it is the traditional pension fund, which is applied to buying an annuity, which is the vehicle which ensures this.
As accountants we might point out that if you can take a lump-sum on retirement, either 25% or three years’ worth, then you should take it because it is the one big tax break which you may get in your life. You may then be able to use it to buy a purchased life annuity which has a more favourable tax treatment. Alternatively you could invest it and live off the interest or dividends, or you could spend it on items of a capital nature. If you don’t take the lump sum, then income from it is taxed at the full rate.