Pensions: the counter-revolution

We are beginning to wonder rather about pensions freedom. When Chancellor George Osborne first introduced the idea that the obligation for UK pension savers to buy annuities with their money was to go in its entirety, we were impressed. We knew he had been pushed into it by the super-low interest rates that were slamming annuity rates pensions freedom was just another consequence of the crisis.

Were also concerned that retirees would have trouble managing their own money throughout retirement: not everyone wants that sort of responsibility. Still, we love the idea of everyone making their own decisions about their money, and we figured the financial industry would find ways to offer savers a degree of security and flexibility.

But here's the problem: pensions freedom isn't much good if a) you are prevented from saving a meaningful amount and b) endless government and central bank policy mistakes mean you are misled as to the long-term value of your investments. To see what I mean on the second point, just look at markets: some of the distorting effects of the series of great global credit bubbles are finally coming back to bite stockmarkets.

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I very much doubt that the first generation of retirees entering drawdown had taken into account the possibility that they could lose 10% of the value of their equity investments in two weeks. The Lifetime Allowance and the changes to the annual allowance both mean it has become increasingly hard for the well paid (and even the averagely paid) to build up good pension pots over a full working life.

The changes we expect in the next budget will make things even worse: if you are a 40% or 45% taxpayer now and expect to be in retirement, why would you save if you are offered not full tax relief, but only a flat rate back of 30p in the pound? It makes no sense. Pensions are set to become the preserve of lower-rate taxpayers alone.

Spare a thought for the nation's fund managers. They live on "ad valorems": so the more money they have under management, the more they make. Collapsing stockmarkets cut their take. But collapsing subsidies do too. And what is pension tax relief but a vast subsidy to the fund management industry?

The Centre for Policy Studies says around 50% of the £35bn of annual tax relief goes to those on more than £50,000-plus. Say £25bn of this ends up with fund managers one way or another. Then let's say higher-rate taxpayers save less as a result of all the change. Half perhaps. That means £12bn-£13bn less flowing from HMRC into fund manager accounts every year (to be charged at, say, 0.7%) than is the case today. There are, I think, an awful lot of people beginning to wish that Osborne had never started down the path of reform.