This will take a while to sink in – we simply have never seen this before in a Budget. George Osborne has just revolutionised the way pensions work; millions of people will have just found their pensions pot turned into a bank account. The punitive 55 per cent tax rate they faced if taking out more than they should from a pension has been abolished. And how much does this cost Osborne? That’s the beauty.
No wonder the Chancellor’s aides were briefing that he’d found a very radical, very ‘clever’ policy. This will make a massive pre-election difference to pensioners, the group most likely to vote at the next election. This bung to Tory target voters will be off-radar to the IFS and Labour because those guys only compute tax and spending changes – not welfare or savings. Osborne moves in their blind spot.
Is it a bung? ‘It’s a matter for people to choose how they spend their money,’ chirped Danny Alexander afterwards – but the Treasury’s forecasts assume that they will spend, spend, spend. If they can pull cash out of their pension, and only pay a normal rate of tax, HMT reckons it’ll haul in £320 million more tax in 2014-15 rising to an almighty £1.2 billion more in tax by 2018-19.
Osborne is, quite literally, banking on a pensioner spending splurge. And politically, what a nice contrast for him. Brown tried to get rich by raiding people’s pension pots. But Tories try to raise cash by allowing pensioners to unlock it, pay lower tax on it, then go shopping.
You can see why help is needed for pensioners. Since the crash, interest rates have been nailed to the floor as Tory and Labour politicians sought to keep Britain on the methadone of underpriced debt. Savers and pensioners were unintended victims. Those forced to buy an annuity found themselves poorer, forever, because the annual payouts (set for perpetuity) have collapsed.
The device of an annuity became a trap. Pensioners ‘have seen their savings eroded quite dramatically,’ said Danny Alexander. You can have saved £400k – no small feat – and find it only buys you £15k income a year. It would be a scandal, if more people knew what an annuity was.
Osborne has today said people can draw down the whole pension, and don’t need to buy an annuity. This will be a huge relief for the 400,000 a year who were dreading being forced to do so. And the rip-off annuities industry has just seen the bottom fall out of its market. Good.
And the voters! Oh, the voters. I can instantly think of about a dozen people I know who will be massively helped by this: not the rich, but pensioners living on a pretty low daily amount, who have cash locked up in a pension that they can’t draw down. Now they can. Pensions who will be delighted that a new Bank of Osborne is to offer 4% interest on deposits – better than any bank. Tens of thousands will be writing cheques – and finding themselves with a reason to vote Tory.
The reason that pension pots have been restricted, the reason why you can normally only take a quarter of it out tax-free, is so you don’t spend the whole thing and end up relying on the state. So Osborne’s plan is fine for now, but what will it mean for a pension in ten years’ time? A cynic would argue that Osborne doesn’t care about ten years’ time. That he’s thinking about ten months’ time, when pensioners’ houses will be full of extra stuff they have bought – just in time for the election.
But personally, I think Osborne is right to argue that pensioners should be trusted to judge this for themselves. It’s a supply-side reform, a liberalising measure. It recognises the pain caused by the annuity massacre, and the trap that savers are in. It’s a vote of confidence in people’s own ability to go easy on their own pension pile – but that’s my instinct. I haven’t studied this, I haven’t seen how this has worked where attempted (if attempted) abroad. Even Ed Balls isn’t passing comment – we’re all in new territory.
And that’s what unnerves me, and gives me lingering reservations about this.
Until now, the UK pensions system has not been a political football. Sure, Gordon Brown would mount a sneaky pensions raid by taxing shares. But people today – even teenagers – invest in a pension on the basis that they know the circumstances in which they can take the cash out in 10, 20 or 60 years time. Osborne’s move today means no one can now be sure about the circumstances in which the state will allow them to move their cash. Osborne has ended this certainty. My instant thought was that a Labour chancellor could put a cage around pensions pots, now that Osborne has established this as a budget manoeuvre.
And Osborne’s offer of giving pensioners 4 per cent a year on their savings is, of course, mad. It’s outright bribery, and had Ed Miliband proposed this citing ‘market failure’ he’d be denounced as a Marxist. He should be radical with what he’s paid to operate, the tax and spending system. But he should not be trying to re-engineer the saving and banking system, with fake banks offering over-the-odds returns (which will provide stiff competition for real banks trying to repair their balance sheets).
My final problem: a change in pensions on this scale should have been put out to open consultation. You can’t just spring this as a Budget manoeuvre for the sake of drama – there is too much at stake. After all, the law of unintended consequences is one that Westminster always unwittingly passes.
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