2014 Budget: well done George

On Wednesday, George Osborne unveiled the 2014 Budget. And what a fantastic Budget it is for all savers out there.

Until Wednesday, the thought of heading into my 50s had no appeal whatsoever. But now suddenly, I’ve got something to look forward to. I can get my hands on my pension without having to pay a punitive fee for doing so.

Now, though I hate rules and regulations, there’s no doubt they’re normally there for a reason. In the case of pensions, the punitive early redemption fees are there to stop retirees blowing the lot and leaving themselves at the mercy of the state in later life.

To me, that has always felt a little unfair. After all, most of these pension savings have been made voluntarily. Why should government stop individuals accessing their own savings if they want? This nannying by the state has undoubtedly stopped many investors bothering with pensions over the years.

But now, the changes to pension savings are hardly credible. And as for the Budget changes on annuities, all I can say is “wow”. After all, annuities are a back door way of forcing pensioners to invest in government debt. Why on earth would Osborne kick that one into touch? Well it seems the government is finally recognising the active role pensioners can play in the economy.

Annuitants must be spitting feathers right now.

Not coercing pensioners  into annuities will have massive ramifications. Not least of which is the pensions industry, an industry that suffered a £5bn write-down in valuation yesterday.

Instead of flowing into expensive annuities, money will now be let loose elsewhere. And there’s no doubt that the stock market will be a prime beneficiary. It’s not exactly difficult to put together an income portfolio that pays better than many annuity policies do. An equity portfolio (rather than annuity) allows pensioners the flexibility to do what they want with their savings, too. If you want to sell some shares to pay for a holiday – then you can. Annuities, on the other hand, are totally inflexible.

I would think that anyone who’s recently bought an annuity will be spitting feathers right now. And if inflation takes off a few years down the line, millions of annuitants will be absolutely screwed as they watch inflation erode the value of their fixed-income annuities.

George’s hat-trick: boosting the stock market, housing market and tax take

The following chart probably goes some way to explaining the chancellor’s thinking. It shows how the new rules will impact the treasury’s tax-take.

Impact of pension changes on Treasury income

As the chart shows, far from costing the chancellor anything, the new breaks are going to be considerably cash flow positive for the treasury.

Basically, the new rules will allow retirees to get their hands on pension savings early. Of course, you’ll still be taxed on this income as normal. And that means more tax for the government. That is, more upfront tax. As the chart shows, this will have severe negative effects on the tax take down the line.

This one change in policy is also going to create a massive and ongoing stimulus for stocks. Of course, it cannot in itself keep the market from falling, but if markets do fall, there’ll be a bigger pool of money sitting on the sidelines just waiting for an opportunity to pick up a nice portfolio of income stocks.

The other classic savings vehicle for us Brits is, of course, housing. Buy-to-let is surely going to get massive fillip from this announcement.

I can see many retirees raiding pension pots to get a deposit for a property to let. Take £30,000 out of your pot (paying tax as you go.) and use it as a deposit on a buy-to-let (pay stamp duty as you go.). Get a mortgage for the rest (the interest of which can be used to reduce your taxable income). Lovely jubbly.

Of course, Osborne knows all of this. It’s a fillip for the stock market, a fillip for the housing market and a fillip for his tax-take. A veritable hat-trick.

What could possibly go wrong?

This new budget has been called a ‘savings revolution’. But while we all celebrate a victory for savers, there’s no doubt this week’s Budget measures are short-termist.

I’ve already mentioned the negative impact this reform will have on the tax take on the long run. But as always, politicians rarely worry about things that are too far down the line – that’s someone else’s problem.

There’s no doubt that many individuals will be tempted to use this flexibility to fritter away their savings. Got a kid’s wedding to pay for? Stick it on the pension. Want a special golden anniversary cruise? Stick it on the pension. New car? Go on, treat yourself. You can’t take it with you, you know.

And while it’s all good for stocks, these measures may help blow a bubble further down the line. And as for housing … well, that’s already in a bubble. And George just reached for the bellows.

But let’s end on a high note. For savers that are prudent, the new changes are a magnificent bonus.

And because the changes are clearly good for the perception of pensions, it’s likely to increase contributions over the years to come. Though that’ll be negative for Osborne’s tax-take, it’s good for society as a whole.

Overall, I’m impressed. Well done George.

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  • Wotan

    Your comments on the budget are complete nonsense. Instead of taking the appropriate macroeconomic measure, i.e. increase interest rates, Osborne has tinkered with savings and pension schemes. He knows that practically all people are only driven by greed and that, consequently, an easy access to their pensions pots with appeal to them. The existing restrictions on pension availability were not picked out of thin air; they were the result of previous experience when people given access to their pension funds promptly blew them and had nothing left for and in their old age. This is exactly what will happen again. The pension pots will either be spent or taken from the savers by the usual parasites, i.e. financial intermediaries such as consultants, advisers, insurers, banks, etc., who will concoct new “investment” schemes, promise savers higher returns and pocket fat fees and commissions in the process.

    This proposal by Osborne is irresponsible and catastrophic and an act of outrageous mendacity that was committed in order to protect the government’s access to cheap money, which would have been threatened by the only macro-economically correct measure, i.e. an increase in interest rates.

    • brynmaxwell

      Maybe I’m just a conspiracy theorist, but were a future government to resort to raiding pensions to pay down the national debt I suspect it would be impossible to include annuities. Therefore, by relaxing the requirement to buy annuities, hasn’t Osbourne vastly increased the size of pot available to raid?

      • 4caster

        No. If fewer people buy or hold annuities, there will be less in that pot to raid. But Osborne has increased the VAT take on cars and yachts at a stroke, not to mention Air Passenger Duty on the holiday of a lifetime.
        And he won’t be around to pick up the pieces when those retirees return to sponge on the state in the 2030s.

  • Warun Boofit

    I disagree with both commentors. Having access to your own pension pot is not greed especially when you see how the present pensions and annuity industry steals money from its customers. I was a member of Equitable Life and lost a lot, I am not greedy, I see myself as having been charitable to the criminals that now have my money. I may not be typical but I can manage my own money better than any pension advisor or money manager or fund manager and thats the way I want it. If I lose money now its my own fault, in the case of Equitable Life I now have to live knowing that a BMW driving fat cat manager lost my money for me and those same people are probably still squandering other peoples savings for them. Child trust funds are another example of how badly money managers perform, the manager has managed to turn £500 into £250 , thats quite a trick , why are these people not in prison. Over the same period they managed to lose half my childs trust fund I managed a very good increase in my own investments, its a lesson I am teaching my kids never trust anyone except yourself to manage your own money.

    • 4caster

      Quite right. But few people have the knowledge, experience or skill to manage their investments. I have been investing for nearly 50 years, and I still don’t always get it right.

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