Let them buy Lamborghinis

28th Mar, 2014

In a modern twist on an old classic Pensions Minister Steve Webb raised eye-brows with his comments regarding the impact of the pension reforms outlined in the budget.

And it’s perhaps more relevant than Mr Webb may have realised – some of you will recall recent analysis of the impact of PPI compensation payments on consumer spending –  as a driver of the consumer led economic recovery.

With an estimated £13.3bn (circa 1% of UK GDP) having been paid out in PPI compensation to date (at a rate of £500m per quarter) we’re not dealing with an insignificant phenomenon here – as such there may be some lessons on future spending and saving priorities that can inform our thinking on future decision making with regard to our liberated pension pots.

Thus it is reported that a holiday (24%), a car (22%) and domestic appliances (19%) are the top three spending priorities for those receiving PPI compensation (average pay-out £2810) with only 12% of people having saved any of their windfall. In a sign of our straitened times the fourth highest (17%) use of the payment was to pay-off outstanding bills.

Of course with the average pension pot reported to be worth £25,000 – nine times the average PPI compensation payment – not to be mention the difference between a one-off windfall and a long term savings plan – the dynamics are likely to be very different overall and especially in the longer-term as the market matures and new financial products and services are made available to newly empowered consumers.

Another point of comparison has been highlighted by Hamish McRae who focuses on the potential for the changes to stimulate a new era of diversified financial investments – away from the sole reliance on property as an asset class that has developed in the UK since the late 1960s. McRae suggests that the reforms could have a similar long-term impact to the changes to mortgage interest relief by Roy Jenkins in 1969. Few people recall that until 1971 more people rented than owned their home (in fact home ownership peaked at 70% in 2002 and has been in decline since – currently below 65%).

There’s no doubt that the budget announcement is a huge change to the dynamics of the pensions market and the wider saving and investment culture – as reflected in the dramatic collapse in the share prices of two leading annuity providers on the day of the budget – the challenge is for the industry to develop new products and services to fit these new realities.

At Trajectory we have undertaken a significant amount of analysis of the over-50s market in the UK especially with regard to finance. Together with recent work evaluating the future of consumer choice we believe this puts Trajectory in a particularly strong position to work with current and future clients on the opportunities and challenges in this brave new world.

The future of consumer choice in the context of the pension reforms is a subject we will be discussing at our next Trajectory Trends breakfast – ‘Personal Pensions and Choice’ on Thursday 24th April….