Yahoo Finance 
Why blowing your pension may leave you better off
One of the major problems I've written about before in the context of pensions is "government tinkering". This is something we've seen again with the fundamental changes announced in this year's Budget.
Governments that seek to win cheap, short-term publicity can quickly contribute to sacrificing our futures in a big way.
The Budget unveiled “the most fundamental change to the way people access their pension in almost a century”. From April 2015 we can spend all our pension pot as soon as we want from age 55, and we'll pay just our usual income tax rate for it. This is in addition to the 25% that we can already take tax free.
The benefits of universal early access
The short-term tax take will rise. For what it's worth, the Treasury estimates it'll have taken £3 billion extra by 2018.
People can more easily pay for emergencies and can spend excess savings.
It weakens the pension industry's hold on us and prevents some scams.
There were plenty of headlines after the Budget which trumpeted things like: 'At last I can spend my own money the way I choose'.
Readers posting 'Hurrah!' messages under such articles got far more thumbs up than thumbs down, offering some form of "social proof" that the policy must be a good one.
So why make a fuss?
Let's focus on the practical consequences of these specific changes. You see there is another group of people who will benefit.
These are the countless people who haven't saved enough and yet will still decide to take most or all of their pension in cash early on. Either because they're the sorts of people who think those on low incomes should buy £600 smartphones or because they're the sorts who, despite educating themselves into becoming barristers and doctors, still max out their credit cards to keep up with their peers or buy properties worth six times their incomes.
Or they simply don't care.
The means-tested conundrum
Many people who blow their pots, whether knowingly or not, will then be on track to be better off over their lifetimes than if they had rationed their private pension pot until they died.
That's because their means-tested benefits will rise to almost completely wipe out any fall in private pension income they would have received had they rationed it for themselves. So they spend their whole pot, on average tens of thousands of pounds, and still get nearly the same retirement income as if they hadn't.
And don't let anyone tell you that the new flat-rate State Pension and universal credits puts an end to this pensioner benefits conundrum. Under current plans, additional means-tested benefits shall continue to exist that top up incomes, reduce household bills, lower personal taxes, grant free dental dreatment and even pay mortgage and service charges.
After all, the government can't have thousands of poverty-stricken pensioners dropping dead from starvation or hypothermia.
[New State Pension top-up scheme explained]
The tragedy of the commons
For many people, deciding to blow your money and live off benefits might be the most rational thing to do. After all, not only could they be better off but, if they don't, they'll be subsidising those others who do.
Taxpayers will collectively have to find a few thousand pounds extra every year, on average, for every retiree who concludes it is rational to spend their pot. Those who don't blow their money will be the biggest losers. It could become a race to the bottom.
Additionally, since the government gets no real future income taxes from many who blow their pots, it will struggle to budget for the future even more than it does now. That could lead to even more ridiculous, short-term polices to tape over the gap.
The government might even then find there's no longer enough money to go round, so those who made a rational decision early on with the information they had available will also begin to face difficulties.
This pattern is called the tragedy of the commons: when it's rational to be selfish but in the long run it can cause ruin to all.
[Save for your retirement with an ISA – see what's on offer]
The exact opposite should have happened
The government is telling us we can spend all our private pension as soon as we get access, if we want.
It should be doing the opposite: forcing people to save more, so they can support themselves rather than rely on taxpayers and younger generations, and then making sure they stretch out a basic income through retirement, for the same reasons.
Please consider all your options
Oddly, the changes I've written about actually make it more attractive to save in a pension, at least until the next “tinker”. The flexibility might not be good for the commons, but pension savers can individually take advantage of it.
It is always vital that you consider both the pros and cons of pensions in your particular sitiation. Only this way can you make a call as to whether a pension is one of the ways you should be preparing for your own retirement.
[Take control of your retirement savings with a self-invested personal pension]
