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.
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.