We all know the feeling; you’ve been on a Stag weekend in Ibiza, and you’ve just been awakened, a bit disorientated on the deck of a ferry to Formentera, with your trousers on back to front, by a group of concerned German holiday-makers with varying expressions of disgust. You’re pretty sure you’ve had a great time, though the finer details are a bit hazy; and there’s a lingering feeling that not everything might be quite as it should.
Anyway, now that the immediate euphoria of George Osborne’s pensions-giveaway budget has dimmed, the mist is rising and the sun begins to peek through. Osborne had, apparently, struck a great blow for freedom and for savers; freed from the restrictions of the unthinking State, people could be trusted to “do the right thing” with what was, after all, “their money”, and not be compelled to buy over-priced annuities from a discredited financial services industry. Even if the “right thing” is blowing the lot on a world cruise, or a stable-lad’s cousin’s tip for the 2.40 at Kempton.
Except that every tax-payer in the country pays more in tax than they otherwise would, to compensate for the lack of tax coming from tax-sheltered pension arrangements. The contributions to these funds are allowable against tax and the funds pay no capital gains tax and no tax on dividends. So maybe we ought to be a bit concerned if we begin to see the local bingo hall car park full of Lamborghinis; maybe the tax-payer owns a share of the new market in sports cars.
The purpose of this tax-free pension zone was to encourage people to save, to supplement what pension they might, eventually, receive from the State. There was cross-party consensus that people should be automatically enrolled into a pension-saving arrangement, with the eventual purpose of securing a lifetime annuity; this was a good idea. But now we’re told “Never mind all that tosh about being responsible and trying to secure a steady income, take the money now, have a party, worry about tomorrow, tomorrow”.
At the moment, in the UK, about 400,000 people buy an annuity every year, worth about £11bn. Experience from other countries tells us that when the requirement to buy an annuity is removed, the numbers doing so fall drastically. This results in lowering the annuity rates, and so those who would still choose a responsible annuity option are penalised. Those not wanting to buy at the reduced rate, may look around and invest in the buy-to-let market, so increasing house prices for first-time buyers, and reducing home ownership. Others will choose to draw-down their pension pot, until nothing remains and all they have left is the State pension.
So, what are the likely consequences of the Osborne/Webb giveaway budget? More pensioner poverty, more inequality, a buy-to-let boom, less home-ownership, and lower annuity rates? That would be quite an achievement.
Maybe we shouldn’t have had that last sherry in San Antonio.
THIS ARTICLE WAS WRITTEN BY A FORMER MEMBER OF OUR TEAM.