Pensions are a major conversation point at the moment, since George Osborne announced dramatic changes in this year's budget. But what exactly is so different from what went before? And why all the fuss?
Essentially, up to now what you could do with your pension pot as you reached retirement was fairly limited. You could take 25% as a tax free lump sum but most people were then tied in to an annuity; meaning you give your capital to an insurance company to give you back a percentage of it every year. When you die they stop paying you and keep the cash. When interest rates were high that was all well and good, but as interest rates have dropped so have annuity rates.
I am 57, so if I were to retire now and give £100,000 to an insurance company I could expect at best to get about £4,900 a year. It wouldn't go up with inflation and when I shuffled off this mortal coil my £4,900 would shuffle off with me and my family could kiss goodbye to my hard earned £100,000.
It doesn't sound very fair, but the rules were there because the Government didn't want the irresponsible so-and-sos of this world spending all their cash in their 60s and coming to the state for help in their 80s when the piggy bank was empty. But from next year someone 55 and over will be able to take their pension pot in a single amount and just be taxed on it at their normal tax rate.
I always wanted a bit more flexibility and control over my finances, which is why I only have a self-invested personal pension (SIPP) now. And after years of watching investments rise and fall I have become rather picky about who I allow to invest my money. Several years ago I narrowed it down to one person - me - after my stockbroker uttered the immortal words over lunch, 'I don't know Huw, where should I put my money?'
That's when I started talking to my friends and finding out how they felt. Two in particular, Welsh dairy farmers Nigel Evans and Bill Ridge seemed to think exactly like I did - pensions, annuities and other managed investments were all high in charges, with no transparency and poor returns. We knew there had to be a better way so in 2006 we did it together; taking our money into our own hands and investing for ourselves.
We wanted something tangible, easy to understand and - since our futures were in our own hands - stable. Bill, Nigel and I all became devotees of the Warren Buffet school of moneymaking, investment rather than speculation. Renting out property to provide a reliable income stream was something we hit on early, two of us were already landlords. But the UK market seemed to be overheating so we shortlisted some European countries and did our homework. We packed into a row of budget airline seats from Cardiff airport and jetted off to various countries including Poland and Latvia, to find out more about each market.
Our own DIY investment success has turned into a property fund. Together, we now run an investment fund specialising in Sweden's residential rental market called Evanridge. The fund has been so successful delivering steady returns of over 12% per annum that it is open to qualifying investors.
Sweden has a huge demand for rented accommodation but properties are in short supply and rents are inflation-linked and set by local authorities, delivering year-on-year tangible, transparent and reliable returns protected from boom and bust.
Under the old rules if my investment with Evanridge over the last 7 years has grown at 10% compounding per year, I would have been forced to give my capital away when I retired and get back less than half of what I was making on it when it was invested. That's why George Osborne's deceptively simple change in the rules certainly grabbed my attention (and I never found budgets that interesting even as a tax consultant). What I am looking at now is a very different landscape, no tie to annuities and a very modern flexibility.
The part that made me sit up and listen is not the 'cash it in and spend it' possibility that has hit the headlines. Instead it's the ability to leave money in a SIPP continuing to compound in a no tax environment. Now I will get to decide which assets to realise and when. They will continue to grow tax free while I am deciding and I will get to decide how much of my pension I need in a particular year. At Evanridge we have always been about taking control of our own financial futures and with this pension change others are free to do exactly the same.