Freeing pensions

 

Some  people as they reach retirement come to see their pension savings as a con. At the top end they saved when they were on low incomes, receiving modest tax reliefs, only to find in later years they will have to pay higher tax rates to get their money out. Some very successful people will find they have saved too much and now get caned by the new tax system above the lifetime limit.  Some on lower incomes will find their pension savings have not bought them much extra pension. At current annuity rates you need around £20,000 of savings to get an extra £1,000 pension a year. All will find that current low interest rates and  past costs of running the pension scheme leave them worse off than they hoped.

I warmly welcome the Chancellor’s proposal to give people more freedom to decide what to do with their pensions savings where they have defined contribution funds. It is far from satisfactory that people are made to buy an annuity  when rates are low and returns poor. The state seems to be saying that it regards people’s savings as in some way the state’s money, to be controlled for people.

In recent days numerous regulators and socialists have emerged from the woodwork to tell us what they really think of us. Apparently they do think left to our own devices we will behave irresponsibly, blowing our money on fast cars and cruises, instead of drawing down our pension savings over the years of retirement in an orderly way. Some even say that as we have received tax relief on pension savings the state has every right to decide how we can spend them. They clearly do not understand that the tax relief on pensions is largely a tax deferral, not a tax break.

I make this prediction. There will be very few people if any  buying a Lamborghini from  their pension pot. Most will have insufficient money, and the overwhelming majority will be far more sensible with their money.

I also say this. By what right does someone rule out any way that a person might end up spending the money they have saved? If someone was told that they had  only a few months to live, and they had saved substantial sums over their lives, who would begrudge them buying the car of their dreams or the holiday of their lifetime before death? People are usually better judges of how to spend their money than is the state.

The ending of the compulsory annuity purchase was one of the best things in a budget for many years. I will be pleased to vote for it, and to defend it. Those who think the state should control our savings belong to that school of thought which thinks that we are all on pocket money from the government. What a ghastly world to live in if we got to that position. Why then would people try harder or work longer hours, if the government decides what you earn and how you spend it? The old communist jibe was “the government pretends to pay us, and we pretend to work”. That’s what kept them in poverty for so long.

 

This entry was posted in Uncategorized. Bookmark the permalink. Post a comment or leave a trackback: Trackback URL.

81 Comments

  1. stred
    Posted March 22, 2014 at 7:22 am | Permalink

    Those of us who took advice and a 5% payback annuity are now wishing we had deferred. The £1000 pa on £20k is not index linked and will soon be worth half its value. To index link, the payback was much lower initially. Anyone able to do so should get out now before Labour reverse policy.

  2. Lifelogic
    Posted March 22, 2014 at 7:24 am | Permalink

    Pension were never a very generous tax break, being mainly a deferral. Also you might have saved at 20% tax deferral then be paying 40-45% tax when you draw. After Brown’s dividend mugging and Osborne’s caps and reduced contribution limit they became even worse.

    You also have the costs of running the scheme, many duff and expensive providers and absurd legal restrictions on your investment choices. Finally the duff annuities that mean you have to live to 20+ years just to get your money back let alone any real return on the capital.

    Why bother to have pensions or ISAs, just let people save outside these artificial, expensive tax vehicles with saving tax breaks and lower taxes all round. People might invest in their businesses, property, shares, secured loans to children to help them buy houses and all sorts of other things. In many case people have person debts or mortgages perhaps paying 5-35%+ while saving into a pension that is paying them just 2% but they cannot let to themselves from the pension. Where is the sense in that?

    Get rid of the new absurd & enforced (on employers anyway) pensions for a start.

    The state has a legitimate concern if they are going to pick up the bill for the elderly without provision. Perhaps the saving tax break should only apply after you have paid in say £100K to the state as an emergency pot to be used for your care in old age.

    Just get rid of ISAs, & Pension structures. Saving is saving lets have lower taxes for everyone who saves. Perhaps get rid of tax relief for “charities” too many have so little to do with real charity.

    The EIS seed EIS are the best tax reliefs going for savers but again the rules are too restrictive and make then rather risky.

    The other problem that deters saving is that Osborne blatantly ratted on the £1M IHT threshold promise (no mention of it in the budget I think). There is thus a great incentive not to have any wealth above £315K(?) when you die. Otherwise he just nicks 40% of it to waste on HS2, pointless bureaucrats, daft wars and endless green crap.

    Still the pension changes are most welcome, but will Miliband just kill them before they even get going in May 2015.

    • uanime5
      Posted March 22, 2014 at 7:07 pm | Permalink

      Get rid of the new absurd & enforced (on employers anyway) pensions for a start.

      Given that the state will have to pay for the upkeep of anyone without a pension there’s no reason to allow companies avoid paying a pension to their staff.

      Saving is saving lets have lower taxes for everyone who saves.

      Since most people don’t save because they lack the disposable income to save your plan is little more than a tax cut for the wealthy. So don’t expect any politician to implement it as a tax law that rewards the wealthy for being rich will be deeply unpopular.

      Reply People will pay their marginal tax rate on money they withdraw from a pension fund. (other than the longstandign 25%)

      • a-tracy
        Posted March 24, 2014 at 9:59 am | Permalink

        Uanime5 all private companies have been paying Employers NI, we were told this was a contribution to healthcare and state pension and people used to have to have 39 (woman) or 44 (man) years contributions employee and employer for a full state pension (public sector workers didn’t have any employer contribution in ni and got a discount on their contribution because of their defined contribution pension schemes). In fact Gordon Brown told people that they were specifically paying an extra 1% for healthcare from their and their employers contribution, so 6% was the intended figure to the employees state pension from the private sector employer.

        I read in the telegraph that the average private sector total pension pot is £30,000 which would give you a pension top up annuity of £1500 pa at 65 with no spouse transfer which would reduce it further! You think its ok for everyone that works in the public sector to have their full final salary pensions protected by the future taxpayers but not the private sector workforce, in this you are probably correct as the whole thing is unsustainable!!!

  3. alan jutson
    Posted March 22, 2014 at 7:25 am | Permalink

    John
    Absolutely agree with your Post today.

    For far too long not only the Government, but Insurance Companies have also controlled the steady extraction of money from pension Funds.

    As you rightly say, tax relief on contributions is simply deferred until eventual receipt, charges for management have proven to be very lucrative for insurance companies, even when performance has been miserable, and the Annuity rate scandal of rent years has been the icing on the cake for their profits.
    Then of course we had Mr Prudent himself raiding pension funds with taxation not just once, but every single year.

    The fact of the matter is Pensions had become such a poor investment for those who have to pay ALL of the contributions into the fund themselves, that many sought to invest elsewhere.

    Whilst I have been critical of George Osbourne in the past, at least on this one he has made a bold and correct decision.
    Shame this type of forward thinking has not been used before or more often in a whole range of areas.

    Like you, I do not think the majority will blow their Pension pots all in one go, some will of course, but then that is their choice, it is their money, not the Governments, and if they do then the Government will get any tax due that much quicker, as they will from any VAT due on the products they purchase.

    • arschloch
      Posted March 22, 2014 at 10:29 am | Permalink

      And you trust Osborne? As soon as all these funds start to get liberated you will see massive cuts in the lifetime and annual allowances and on the tax relief on contributions. HMRC are not going to let all that money slip through their fingers with no payback

      What a bloody cheek calling me a socialist for pointing out that once their pension funds have been drained the feckless will become dependent on the state. If it was not for your socialist money printing annuity rates would not be so low in the first place. Remember the feckless already have form but we are yet to see it because ZIRP stops them defaulting on mortgages they could never afford.

      • alan jutson
        Posted March 22, 2014 at 4:02 pm | Permalink

        Arschloch

        Did I say I trust Osbourne ?

        Did I call you a Socialist ?

        Annuity rates, yes QE was partly responsible, as were the Insurance Companies who thought they were on to a bloody good thing.

        Come on, 20 years to get your own money back with no interest included.
        Thus you have to live until you are 85 just to get your own money back if you retire at 65.

        They have reaped what they have sown.
        Which Is what I have written.

        Please do not try and put words in my mouth it does not become you.

        • a
          Posted March 23, 2014 at 7:53 am | Permalink

          no offence the “socialist” tag came from JR

      • Bill
        Posted March 22, 2014 at 10:16 pm | Permalink

        I don’t see it like this. The money taken from pension pots can be spent on consumer goods and therefore help to revive the economy.

        • alan jutson
          Posted March 23, 2014 at 9:08 am | Permalink

          Bill

          Exactly

          If people draw out lump sums after the 25% tax free amount, then they pay tax on it, this way the Chancellor is getting his share more rapidly than if it was drip fed over a lifetime, and he gets VAT as well on the immediate spending.

      • bigneil
        Posted March 23, 2014 at 10:18 pm | Permalink

        Further to your comment regarding when the feckless have emptied their pots . Have read today that about 160,000 “inactive” East Europeans here have cost the NHS £1.5bn. Just the NHS. Add on the housing costs. Add on the benefits cost. Add on any schooling. Add on the fact that they are going to fight tooth and nail if our govt ever gets a pair and tries to deport them. They are contributing NOTHING towards a pension. Who pays for their “pension?” I am sure the EU will rule in their favour. Add on that Ukraine and Turkey want to join the EU. – -financial catastrophe. We cannot support the world, but this govt appears to think we can.

  4. Mike Stallard
    Posted March 22, 2014 at 7:31 am | Permalink

    OK. When my father in law, a thrifty state headmaster, died, he left us half of his lifetime savings. Not much, it is true, but worth investing. And, of course, we did and have lived off the sum ever since. For ten years we have enjoyed life a lot, travelled abroad and eaten surprisingly well.
    I honestly do not know of anyone who has blown their inheritance on something silly. Nobody. Do you?

    That means that the next step is to stop treating us like babies and to stop pillaging our incomes. My son and my daughter both live in countries where there is no welfare worth speaking of. They survive very well, which is why they live there. I do not think any of their friends suffers the extremes of poverty either. They cope. Without the heavy burden of taxation and the massive bureaucracy welfare demands, life is freed up, people start to sparkle and work becomes a pleasure.

    This could be the first step along the way to our government learning a little humility. But, of course, we will have to leave the greedy EU first!

    • Bill
      Posted March 22, 2014 at 10:19 pm | Permalink

      My uncle went to live in Guatemala where few public services were provided. He had to hire security guards to protect his property because the police were invisible.

      But at least he did not pay tax!

      • APL
        Posted March 24, 2014 at 1:03 pm | Permalink

        Bill: “But at least he did not pay tax!”

        There is nothing wrong with paying tax. If you get something reasonable in return.

        If you are old, that is the fraction of the British population that have paid most into the system, you have a not insignificant chance of being killed in an NHS hospital – via the Liverpool pathway – that is starved to death, the RSPCA would prosecute someone who treated a dog like that.

        If you are of working age and British, Politicians have decided to replace you with people from … anywhere but the UK.

        If you want an education, the British education system has fallen out of the first world education league.

        The police, are more interested in enforcing the political correctness rather than the Law of the Land.

        And our Politicians tell us we have no constitution!

        Guatemala is looking more enticing by the minute.

  5. Lifelogic
    Posted March 22, 2014 at 7:41 am | Permalink

    Why on earth (for example) restrict pensions from buying residential property (or indeed investing in ones own business). People need residential property, it is just as valid an investment as commercial property, businesses, equities, loans or anything else? Often rather better as the directors and middle men cannot rob shareholders quite so easily as they so often do with quoted and unquoted companies.

    Keeping the owner close to their investments with few middle men and contrived structures is so often the best way to go.

    • Lifelogic
      Posted March 22, 2014 at 12:19 pm | Permalink

      The main incentive to buy a Maserati or similar is not the new pensions rules it is Osborne’s ratting on the £1M inheritance tax threshold. This is also a huge disincentive to save or to still work in later life – if you do not need to. Get rid of inheritance tax completely, perhaps charging normal CGT only on death – rather than the 40% of total capital tax theft.

      Might as well buy a Maserarti and have save the 40% in IHT. Mind you they are not very well suited to carrying wheel chairs, oxygen cylinders or electric buggies for later life.

      • alan jutson
        Posted March 22, 2014 at 4:06 pm | Permalink

        lifelogic

        The best way to look at such a purchase is to say the Chancellor is helping you with a 40% tax break, because 40% is what he would take if you left more than £325,000 so you may as well enjoy it while you can.

        The Chancellor gets most of it back anyway with VAT, car tax, insurance surcharges and fuel duty.

      • Bill
        Posted March 22, 2014 at 10:19 pm | Permalink

        Yes, but they will probably appreciate in value!

        • Lifelogic
          Posted March 23, 2014 at 11:09 am | Permalink

          They do not appreciate that often.

      • oldtimer
        Posted March 23, 2014 at 9:32 am | Permalink

        A Maserati would be a bad choice!

  6. A different Simon
    Posted March 22, 2014 at 7:45 am | Permalink

    John ,

    The state has done everything it can to puff property prices .

    Almost everything people will earn will get paid to the banks in mortgage interest margins (5% – ZIRP) with the result that people have nothing left over to save .

    Their pension income has effectively been brought forward and spent already on accomodation .

    I suspect this is perhaps a deliberate policy of the elites to ensure dependency in later life .

    Shouldn’t the state also be offering an equity release scheme ?

  7. A different Simon
    Posted March 22, 2014 at 7:56 am | Permalink

    I agree with your comments but have resigned myself to working like a dog for 50 years with the full expectation that the state will expropriate my savings .

    To get an inflation linked annuity of 1k/year would require around 28k , not 20k .

    Just shows how expensive it is to guarantee anything .

    If the state sector pensions plans are really so affordable how come the state refuses to open them up to everyone ?

    Could it be that the costs are deliberately understated ?

    • Lifelogic
      Posted March 22, 2014 at 12:27 pm | Permalink

      Indeed 28 year just to get your money back and that is before it is taxed at 20-45%. So you are perhaps 93 before you break even. More if you got only 20% relief going in and now pay 40%/45% on drawing it.

      Annuities are a complete rip off mainly, due to the investments the providers are forced to take ie. lending to government. It is another back door tax in effect. NI (both) takes about 23%, income tax 20-45, vat 20% then you have this pension annuity tax, road tax, council tax, duties, fines, CT, insurance tax, licence fees, planning and building control fees, IHT …. surely we are nearly at 100% of income now? Then only the black market survives.

      • A different Simon
        Posted March 22, 2014 at 1:36 pm | Permalink

        I’ve read a few responses to the budget from left wingers .

        They repeatedly make the case that 100% tax relief on contributions i.e. 40% tax relief on pensions contributions for higher earners is unfair when basic rate tax payers only get 20% relief .

        They completely miss the point that people would rather take a 40% hit than lock it up in an inflexible vehicle like a private pension which Govt’s have up until now just treated as their ATM and changed the rules at will .

        • Lifelogic
          Posted March 22, 2014 at 3:56 pm | Permalink

          Indeed no point at all in putting it in at 20% relief then getting it out with 40-45% tax, plus all the cost and huge inflexibility on top.

          The left are seeking the votes or rather dim people in the main BBC, Guardian thinkers (at best) so they can get always away with saying almost anything that makes their voters feel envious. “Tax cuts of £50K for millionaires” they kept saying – but meaning people who earned £1M PA. Accuracy and logic are not high on their lists. Jealousy, envy, the “its not fair” agenda, and a chip on the shoulder is the name of the game.

          They are shameless. Lefties (and the BBC often say that that housing benefit all goes to landlords. As if the tenant derived no benefit. Is it not the tenant who gets the house rent free? They say landlord get tax relief on interest well of course they do it is a cost of providing the house. Anyway the bank pay the tax on the interest!

          Life never was or will be fair you just do your best get over it lefties!

  8. Iain Gill
    Posted March 22, 2014 at 7:58 am | Permalink

    I agree with everything you say John.
    But I want the government to go further. I want the government to trust me with the funds dedicated to my childs education, and let me spend it on any school I choose and change my mind every term as I see fit. I want the government to trust me with the funds dedicated to my own healthcare, and let me choose my own GP and move GP unrestricted by catchment area and GP cartels. If I am needy I want the government to give me control of my housing subsidy so that I can choose how to direct it, rather than being forced into state subsidised social housing, or being forced into a help to buy scheme. I want spending power in the hands of individual citizens to force the providers of services to up their game in all areas of life.
    As an aside… I (know someone ed) with a Lamborghini (bought from the proceeds of being a large scale buy to let landlord making stacks of money from single mothers supported by benefits, a class of tenant with a government backed secure income stream that is pretty secure and not going anywhere)… he lives in (named place ed)… and it cost more for the secure garage and high tech alarm surrounding it than the car cost! The secure garage needed to stop it being stolen is a bigger investment than the car itself. So I think anyone using their pension pot to buy such a car needs a bigger pot than you would think with such costs added.
    My biggest problem with the pension change is that it will result in extra funds hitting the economy earlier, as sort of quantative easing of sorts, and this will distort markets. Certainly a lot of money is going to be taken out of pensions and put into houses, and the ongoing mass manipulation of the market by the government on house prices are just added to here. I don’t think the thousand and one manipulations to force house prices up do the country any good, individually they may be no big deal, collectively they are a massive mistake.

    • acorn
      Posted March 22, 2014 at 3:07 pm | Permalink

      The “extra funds hitting the economy”, will be a positive “fiscal” stimulus and be noticeable, just like PPI refunds and will compensate, slightly, for the negative fiscal stimulus of deficit reduction austerity. The cash goes straight into consumer’s hands, and most of it will buy stuff with VAT on it for Mr Osborne.

      QE is monetary stimulus that only gets as far as propping up corporate balance sheets, via the commercial banks. QE just changes the maturity of “financial” assets in the economy, only the Treasury can increase the amount of financial assets by spending new money into the economy.

      Mr Carney is shaking up the BoE. The latest Quarterly Bulletin 2014 Q1, is a good read, especially if you have kids doing economics. http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx .

      MMT is breaking out, nearly, but it is still reluctant to admit that interest rates only have a mild effect on the economy. The last six years have shown that they do not affect commercial bank lending directly, as was once thought. Also, as others have commentated today, it does not mention that a sovereign fiat currency is a sovereign tax credit for paying the Treasury.

      BTW. Business Model Analysis is the new flavour at the PRA for the Insurance (and Annuity = topical!!!) Industry; worth a read. In a sort of poll yesterday evening, the small business owners were going to blow their various small pension pots; the employees were not. Tells you something about people, yes?

  9. JoeSoap
    Posted March 22, 2014 at 7:58 am | Permalink

    Indeed you are right. This was an obvious change which needed to be made. One has to wonder why it was sitting there waiting to happen for so many years. Insurance company lobbying? It also has to be seen in the context of lowering both lifetime limits and maximum contribution levels under this government. In the case of contribution levels these have been reduced from the 2006 level of above £200’000 to £40’000 now, a precipitous drop.

    Unfortunately there are numerous other financial anomalies which need tackling, and just taking pensions alone:

    Why is pension saving being enforced on workers who receive wages below the tax threshold via NEST, when it would be better economically for them to take the money and either buy necessities with it or put it in an ISA?
    Why is pension saving AT ALL being enforced via the tax-like NEST system?
    Why are parts of the judiciary and other elites being exempted from the lifetime maximum level of pension saving?
    Why are public sector workers including MPs provided with privileged, safe, defined benefit pensions when all others must struggle along with defined contribution schemes?
    Why do the goalposts KEEP being moved in a system which is intended as a very long-term savings vehicle? From lifetime allowances going up and down, contribution levels going up and down, GAD rates changing,…..

    When more of these have been cleared up we’ll be a lot happier

    • JoeSoap
      Posted March 22, 2014 at 3:25 pm | Permalink

      Then the Coalition government can start clearing up the mess they have made at the other end of the spectrum – student loans. 45% of loans now being written off, who’d have thought it? Lend £30K+ to “study” a donkey course, then expect this to be paid back out of wages over £21K a year? Then like Clegg tell students it isn’t a real debt because they only have to pay it back when earning enough… Crazy!
      We need to get back to a system where you have to be good at something useful, where the loan has 99% chance of being repaid, to qualify for any kind of grant or loan. This should include funding employers for training apprentices just as it does for funding universities to train graduates.
      Anything else should be paid for by the student UP FRONT.

  10. Gary
    Posted March 22, 2014 at 8:03 am | Permalink

    So let’s now take this to its logical conclusion and get the govt out of the market and out of our lives completely.

    “When plunder becomes a way of
    life for a group of men living in
    society, they create for themselves,
    in the course of time, a legal
    system that authorizes it and a
    moral code that glorifies it.”
    - Frederic Bastiat

    • Lifelogic
      Posted March 22, 2014 at 12:28 pm | Permalink

      Indeed and special tax & pension laws for just this group of EU and the government powers that be.

  11. matthu
    Posted March 22, 2014 at 8:03 am | Permalink

    The proof of the pudding as regards pensions will always lie in how future governments choose to tax your drawdown when you choose to spend or re-invest it. If politicians could devise a means of transferring profit from financial advisers to the government in as obscure a manner as possible, be assured that they would do so. The collapse of the final salary pension scheme in the private sector is entirely due to previous governments being unable to resist changing taxation law so as to penalise people in the private sector at the expense of the state.

    One advantage of the announced change is that it more or less forces pension companies to devise new investment vehicles which will be more attractive to pensioners. One such vehicle that already exists is an insurance bond that allows the holder to make an investment, withdraw a certain level of income each year without being liable for capital gains tax, and when the holder dies, unlike an annuty, there is still some value left to pass to the estate.

    One of the problems (for someone who has only managed to save up, say, a couple of hundred thousand pounds into his pension pot) is that the tax treatment surrounding this type of insurance bond is overly complicated for the average pensioner without access to an accountant.

    Another question is how the pension pot will be taxed if the holder decides, say, to emigrate and re-invest the whole fund outside of the UK. This is after all the ultimate effect of allowing pensioners freedom to manage their own savings. If the whole lot were to be taxed as income in a single year at normal marginal rates of tax there would still be little incentive to build up savings in a pension.

  12. Alan Wheatley
    Posted March 22, 2014 at 8:10 am | Permalink

    I predict that annuity rates will fall even lower as a consequence of the Budget proposals.

    • alan jutson
      Posted March 23, 2014 at 9:15 am | Permalink

      Alan

      Why should annuity rates go down even more ?

      Surely Companies should start offering better rates to encourage people to purchase them if they feel they are such a good idea.!

      No sympathy at all for the insurance companies, the Customers now have a choice, before they were legally constrained sitting ducks , just waiting to be picked off.

      • Alan Wheatley
        Posted March 23, 2014 at 11:24 am | Permalink

        Because those who anticipate living a shortish time on an annuity (ill health, genes) will cash in and those who anticipate a longish time benefitting from an annuity (healthy lifestyle, genes) will take them out. So the balance of risk for the annuity provider changes.

        You also need a cast-iron guarantee that you annuity is safe. The more competitive the maket for annuities the more likely a provider will miss-calculate in seeking to gain an advantage and go bust. Who underwrites the pensioner’s investment?

        • alan jutson
          Posted March 23, 2014 at 7:50 pm | Permalink

          Alan

          Those with a projected short lifespan have always been able to get an enhanced Annuity/pension, will this change ?

          Most people have absolutely no idea how long they will live !

          Insurance companies policies are underwritten to 90% of their value by the taxpayer through the insurance guarantee scheme which operates now if they go broke.

          Of course if you were an Equitable life victim then they are only paying out 22% because the Company tried to sort itself out, and did not actually go broke.
          Some incentive to resolve your own problems !!!!!!

          • Alan Wheatley
            Posted March 24, 2014 at 8:30 am | Permalink

            We need an actuary to give the fully reasoned argument.

            In a situation where all pension holders had to convert it (or most of it) on maturity into an annuity the life companies could calculate their future liabilities across the population.

            Where annuity holders are self selecting they are more likely to be the ones most likely to benefit most, so no longer representative of the population. I think this means the risk to the life company goes up and so the return goes down.

    • Alan Wheatley
      Posted March 27, 2014 at 8:36 am | Permalink

      I hear on Radio 4 this morning (Thursday 27th) that the shares in life companies started to fall upon the annuity announcement, even before the end of the Chancellor’s Budget Speech. And that the shares in companies that just provide annuities have fallen by 25%.

      Seems that the changes announced with respect to annuities are have far reaching effects, and not necessarily what the Chancellor intended nor expected.

      Of course, the changes may facilitate a short-term release of capital, and with it more consumer demand. Is that what the Chancellor was really trying to achieve?

  13. The PrangWizard
    Posted March 22, 2014 at 8:31 am | Permalink

    Well said, well said indeed!

    We all know that the Left are people haters, here we have described another example of it is manifested. The Left is all about control. They know and fear that if people are given a choice they will choose freedom.

  14. matthu
    Posted March 22, 2014 at 8:37 am | Permalink

    John,

    Perhaps while you are defending the new pension proposal in the House you will also have an opportunity to suggest that consideration is also given to simplifying the law over relatively modest discretionary trusts.

    Consider someone of relatively modest means, with two children one of whom has special needs. Current wisdom is that he should consider passing on his estate by setting up a discretionary trust as a tax efficient means of providing security for his children.

    However, the annual burden of filling in a special tax return for the discretionary trust (which currently requires you to acquire non-HMRC software if you wish to submit it online) is quite disproportionate to what should be required and not an additional responsibility that you would want to ask a non-professional person to take on and neither would you want them to engage a professional advisor to do.

    So now that the government has given consideration to simplifying pensions I hope they will also give consideration to simplifying relatively modest discretionary trusts. Preferably without ongoing involvement of expensive lawyers, accountants or the courts.

    • Lifelogic
      Posted March 22, 2014 at 12:32 pm | Permalink

      Indeed anything that simplifies and get rid of lawyers, bureaucrats and tax accountants the better. We have about 12 times the number of Lawyers as Japan and the US has 3 times what we have. Nearly all destroying net wealth.

  15. oldtimer
    Posted March 22, 2014 at 8:48 am | Permalink

    Quite right. The rot set in with Brown`s taxation on the dividend income of pension schemes – a measure that effectively passed the cost on to the pension providers. That, inevitably, has resulted the long slow death of the final salary scheme. The treatment of savers by governments has been abominable.

    The new proposals are a welcome reform and, for ISAs, a welcome and rare simplification of a small part of the tax system..

  16. Leslie Singleton
    Posted March 22, 2014 at 9:07 am | Permalink

    What I do not understand is the connexion that is somehow assumed between employers and their staff’s pensions and, in particular, I believe that that latest, presumably Government, pensions advertisement, which says something like, “And the best part is that your employer has to contribute too”, is wrongheaded and verging on evil. If the Government decides it has no choice but to get involved that’s one thing, but to force employers to do so is hard to believe. I thought we were trying to encourage people to set up businesses and hire staff. I for one would never consider setting up a business these days. It would not be the entrepreneurial risks involved that would put me off; but rather the heaps or perhaps hoops of bureaucracy and God knows what else which would then continuously have to be jumped through. Maternity leave is another prime example especially when artificial and enforced female identity is forced on employers. Maternity is a wonderful thing but what has it to do with your boss?

    • Lifelogic
      Posted March 22, 2014 at 12:33 pm | Permalink

      Indeed a huge tax and distraction for business people who should concentrate on running the main businesses. Not silly half baked pension schemes.

    • uanime5
      Posted March 22, 2014 at 7:21 pm | Permalink

      If the Government decides it has no choice but to get involved that’s one thing, but to force employers to do so is hard to believe.

      I guess that state got tried of employers milking their employees, then expecting the state to pick up the pieces. This is no different than introducing health and safety regulations to reduce the number of injured employees that require a lifetime of care.

  17. Andyvan
    Posted March 22, 2014 at 9:08 am | Permalink

    “People are usually better judges of how to spend their money than is the state”

    No not “usually”, “always”. Even if they are a drunken and stoned sailor on his first shore leave for a year they’d be better than the state.

    • Lifelogic
      Posted March 22, 2014 at 12:35 pm | Permalink

      Not quite always, they do buy lottery ticket, become drug addicts and alcoholics but certainly nearly always.

  18. Richard1
    Posted March 22, 2014 at 9:43 am | Permalink

    It is an excellent reform. It is interesting that leftists clearly don’t like it, but dare not oppose it completely. What’s the Labour Party’s view on the budget, 3 days later? We still don’t know. Are they for the pension reforms or against? for the welfare cap or against? Miliband was quite pathetic in his response on budget day, but he, Balls and Co have still to come up with any substantive comment at all. Its the same drivel about ‘cost of living’ as if this was something decided by a govt dept, and how posh the Tories are. Will people really be taken in by this and vote back in the same nincompoops who brought us the great crash and recession, the sale of the gold, the ill thought out wars in Iraq and Afghanistan etc?

    Reply The Labour front bench have now decided to vote for the Welfare cap and to support the pension policy.Many others in the Labour movement are not happy about this.

    • Lifelogic
      Posted March 22, 2014 at 4:01 pm | Permalink

      Perhaps Miliband (with his half decent Maths, Further Maths and Physics A levels) is indeed numerate and sensible under the loony left, state sector unions, veneer.

    • uanime5
      Posted March 22, 2014 at 7:25 pm | Permalink

      Its the same drivel about ‘cost of living’ as if this was something decided by a govt dept

      Well the cost of living is influenced by Osborne’s economic policies, which caused 3 years of stagnation; the real term salary cuts being inflicted on the public sector (except for MPs who get an 11% rise); and all the welfare cuts. So as long as people are worse off now than in 2010 don’t expect them to vote for the Conservatives.

      Also I doubt the welfare cap will be viable, especially if house prices keep rising and salaries keep falling.

      Reply MPs’ pay has been frozen like the rest of the public sector, and pension contributions have been increased to cut MPs take home pay.

  19. Magnolia
    Posted March 22, 2014 at 10:39 am | Permalink

    Agreed.
    This is Big Bang for pensions.
    A lot of the money will probably support housing down the generations which will benefit the whole family as well as the banks all at the same time.
    Genius politics, clever economically and Labour floundering, open mouthed, incredulous and out of ideas.
    Now can we have our taxes returned so that the whole family can spend it instead?

  20. Tedgo
    Posted March 22, 2014 at 10:50 am | Permalink

    I think it should be back dated too. People who feel they have had a bad annuity deal in the last few years should be allowed to take out the residual sum. It’s easy to calculate.

    My partner had a small pot of £6000. She took the £1500 lump sum, and now receives £159, after tax, every year, 28 years to get her money back.

    • APL
      Posted March 22, 2014 at 4:37 pm | Permalink

      Tedgo: ” 28 years to get her money back.”

      Factor in the government inflation policy, she’ll never get the purchasing power of the money she put into the fund.

    • alan jutson
      Posted March 23, 2014 at 9:18 am | Permalink

      Tedgo

      Exactly, a legalised rip off return.

  21. Atlas
    Posted March 22, 2014 at 11:17 am | Permalink

    I agree with your sentiments John, however is there a possibility that Osborne is doing this for Treasury short term tax income as people liquidate their pension pots – so making the deficit look better than it really is for electoral purposes?

    Certainly there will less institution money available in the future to be invested in Government wheezes like HS2.

  22. forthurst
    Posted March 22, 2014 at 12:33 pm | Permalink

    “In recent days numerous regulators and socialists have emerged from the woodwork to tell us what they really think of us.”

    They may be telling us rather more about themselves, that they are congenital control freaks who fantasise about a world in which nothing would happen unless they themselves ordained it. The post war Labour administration perfectly illustrated this and in doing so did real permanent harm to the economy and the country with some of the worst legislation ever put before parliament. “Can I have a chocolate bar?” “Sorry, the Ministry of Food says no. You’ve already had your ration for this week. How about some powdered egg, instead. It’s much better for you!”

    • A different Simon
      Posted March 22, 2014 at 1:49 pm | Permalink

      I admire most of the achievements of the post-war labour Govt and think that later govts can be blamed for letting the welfare state become abused .

      Had never before thought about rationing as being anything more than a necessity but now you come to mention it whitehall and a large part of westminster must have been against it’s repeal .

      • forthurst
        Posted March 22, 2014 at 6:54 pm | Permalink

        simon says: “I admire most of the achievements of the post-war labour Govt”

        A particular favourite? Rail, steel, coal, road transport, gas, electricity, hospitals with monopsony for medics, British Nationality Act etc? What was the secret of the post-war German ‘miracle’? The Marshall Plan or a slightly more jaundiced view of a bolshevik style command economy as opposed to our naive socialists for whom ‘Das Kapital’ was an economic treatise?

  23. Antisthenes
    Posted March 22, 2014 at 1:28 pm | Permalink

    By the lefts and other nefarious control freaks logic then any state benefit received should be subject to being spent by the recipient in a way that the state dictates. However as you rightly point out pensions saving receives a benefit that is in the end paid back and the left defends vigorously the right of other benefit recipients to spend it in any way they wish. We know the left are a bunch of hypocrites and authoritarian statists and this is just another example.

  24. margaret brandreth-j
    Posted March 22, 2014 at 1:34 pm | Permalink

    The jibe against me is work her like a slave and pretend to pay her . Pretend to take the tax and pay the Government and let her pay for our shortfalls.
    Never mind The ‘Knackers yard’ is for all not just the selected martyrs.

  25. Terry
    Posted March 22, 2014 at 2:24 pm | Permalink

    I have been advocating this move for years. It’s not right that the State have control over anyone’s savings whatever their form. Those that do choose to cash in their pension funds will immediately contribute to the hard up exchequer who otherwise would have had to wait years for those same tax ‘donations’. Furthermore, the new plans will encourage the youth of toady to take their pensions far more seriously and turn them from current spenders into tomorrow’s savers for their own futures. A very welcome move by the Conservative Chancellor but I do wonder what the juniors in the coalition thought of it. Allowing the citizens to decide for themselves in not in the socialist DNA and that is why they should never be permitted to run this country.

    • Bob
      Posted March 22, 2014 at 5:37 pm | Permalink

      @Terry

      Furthermore, the new plans will encourage the youth of toady to take their pensions far more seriously and turn them from current spenders into tomorrow’s savers for their own futures.

      There would need to be an irrevocable guarantee that future governments could not reverse the change..

      You only need to look at the Cyprus bank account raids to see what they are capable of.

    • uanime5
      Posted March 22, 2014 at 7:29 pm | Permalink

      Furthermore, the new plans will encourage the youth of toady to take their pensions far more seriously and turn them from current spenders into tomorrow’s savers for their own futures.

      Given that most of the youth of today are mainly in low paid or in some cases unpaid jobs they’re not going to become savers any time soon.

      • Edward2
        Posted March 23, 2014 at 9:15 am | Permalink

        But they save might if encouraged Uni.
        There is always room in every budget to save a little.
        It is all about priorities.
        Perhaps a little less spent on the latest mobile phone, expensive trainers, computer games, fast food or even reducing tobacco and alcohol consumption, would free up a few pounds each week towards a pension.

  26. Lindsay McDougall
    Posted March 22, 2014 at 3:05 pm | Permalink

    I very much welcome the freeing of pensions. If you have a pension pot of £500,000, you can have a comfortable life with an annuity on top of the state pension; perhaps you can even inflation proof your annuity, although that means doing with less in the early years.

    I suspect that my position may be typical. I have a pension pot but it’s not big enough to deliver a decent income from an annuity – which is why I refused one. I had some savings outside of the pension pot, and I’ve been able to pick up some consultancy work as a free-lancer. The result is that I may be able to postpone draw down until I am 70 and then (thanks to the budget changes) draw down over a period of 10 years. After that comes death or downsizing. It’s just good that I have some choice over timing.

  27. APL
    Posted March 22, 2014 at 4:44 pm | Permalink

    “Those who think the state should control our savings belong to that school of thought which thinks that we are all on pocket money from the government. What a ghastly world to live in if we got to that position.”

    Whole hearted support for this post Mr Redwood.

  28. BobE
    Posted March 22, 2014 at 4:47 pm | Permalink

    Three years ago I used all of my pension pot to buy a SIPP. Self Invested Personal Pension. This pays a monthly sum and the inversted pot grown in a managed fund. I had no need to buy an annuity. What was the problem?

    • alan jutson
      Posted March 23, 2014 at 9:30 am | Permalink

      BobE

      From my limited knowledge.

      Most people did not have enough in their fund to purchase a SIPP (which usually has higher/minimum charges), then you had the excessive tax charge rates depending on how and when you crystallised the amounts, as I understand it.

      Also thought you had to purchase an Annuity at 75 years of age no matter what system you chose.

      Many people did not understand the full tax implications of the old system, and would need to consult an accountant or put trust in their financial advisor to tell them the complete picture.
      Government rules on how much you could draw down each year.
      Some parts of your pension pot could attract a tax of 55% I believe.

      The new system is now so much simpler.

  29. Martin Conboy
    Posted March 22, 2014 at 5:45 pm | Permalink
  30. uanime5
    Posted March 22, 2014 at 7:30 pm | Permalink

    Apparently they do think left to our own devices we will behave irresponsibly, blowing our money on fast cars and cruises, instead of drawing down our pension savings over the years of retirement in an orderly way.

    Well many people already aren’t putting enough towards their pension while they’re working, so it’s likely that some people won’t spend their pension savings in an orderly way.

    Those who think the state should control our savings belong to that school of thought which thinks that we are all on pocket money from the government.

    In other words a school of thought that only exists when the Conservatives need a villain they can pretend they’re saving people from.

    • alan jutson
      Posted March 23, 2014 at 9:34 am | Permalink

      uni

      “….conservatives need a villain they can pretend they’re saving people from”

      Absolutely true, remember Gordon Brown’s raid on Pensions or have you conveniently forgotten.

      Would you trust Ed Balls with your money, given all of his predictions a seem to be working out negative. !!!

  31. MartinC
    Posted March 22, 2014 at 7:43 pm | Permalink

    I agree with many of Mr Redwood’s views but I think this one is worthy of some challenge. If we are talking about ‘individual liberty’ then some of us, who have neither benefited from good final salary pension schemes or indeed the very generous scheme for MPs, exercised our own ‘liberty’ some years ago to save in money purchase pensions on the basis that the annuity sustem would continue broadly as is but with some improvements, providing us with a certain if not necessarily generous income in later life. We can’t all rely on ‘downsizing’ and do not wish to enter the buy to let market, income from which is far less certain.

    Although the pensions industry has vested interests it is of some concern that there appears to have been no consultation with the industry before this announcement. There may be unintended or ignored consequences from this policy – surely for example the long term ‘pool’ of annuitants will decline, meaning that annuities in future will offer worse value for money than would otherwise be the case. Where else can one find as ‘safe’ an investment as an annuity? Maybe cash ISAs from some providers, but their interest rates are worse. Platitudinous statements such as ‘the market will innovate and generate new products’ are not very reassuring to some of us.

    Any reassurance you can provide would be much appreciated.

    Reply No-one is denied an annuity – people if they wish can carry on doing as they have to today. Nor do I see why fewer annuities means less good terms – it might mean better terms if there is less aggressive buying of government bonds by companies setting up annuities.

  32. zorro
    Posted March 22, 2014 at 11:43 pm | Permalink

    Great post and comments from all. This is an excellent move which surprised me. Now if he had put IHT up to a million at the same time that would have guaranteed you the next election…

    zorro

  33. Steve Cox
    Posted March 23, 2014 at 4:56 am | Permalink

    Annuities are usually funded by the purchase of long term gilts by fund managers. If people with defined contribution funds are no longer going to be coerced into this (currently highly unattractive) system then it must mean that the demand for gilts is going to drop sharply. Yet the government is still going to have to issue the same amount of debt to fund its addiction to overspending, so a reduction in demand for gilts implies one of two possibilities:

    1) Gilt yields will have to rise sharply to make their purchase more attractive. This might also mean that annuity rates will rise sufficiently that fewer people will be tempted to tinker with their pension fund and will instead opt for an annuity paying a decent rate. The downside to this scenario is that the government’s interest repayments will start to rise sharply as new issues of gilts will be at the higher yields.

    2) If gilt yields do not rise, or are not allowed to rise significantly by the powers that be, then the BoE will have to resume its money printing QE programme to fund the government’s deficit.

    Perhaps Mr. Osborne is counting on the deficit being reduced quickly enough that neither of these options will be required when significant numbers of people actually get the option not to take an annuity, i.e. to indirectly buy government debt? I don’t see either of these two scenarios as being unduly bad for pensioners, but neither of them will be good for the wider British economy. I wonder what the Treasury told Mr. Osborne about this in its pre-budget analysis of the options?

  34. William Long
    Posted March 23, 2014 at 10:18 am | Permalink

    Clement Attlee had a maxim that nothing is ever as good, or as bad, as it might have appeared at first sight and I suspect this applies as much to the change on pensions as anything else. I think the most important thing from its announcement is the statement that you should be able to do what you like with your own money (not something we have heard unequivocally from Dave Cameron’s Conservatives for some time if ever) and its acceptance by Labour, still more amazing. One must therefor applaud the principle, but beware of the pitfalls.
    First of all there is the point from several commentators that the step is likely to result in a rise in the tax take in the short term; perhaps the Chancellor was not being totally altruistic then!
    Will people take care of the asset that is now put firmly in their hands? Most will; people are not stupid, but I cannot get rid of the memory of a statistic that was told me some years ago by the then Master of the Court of Protection: 80% of personal injury awards that were placed directly in the hands of the recipients were totally dissipated within five years.
    Finally there is the question of the merits of the much maligned annuity. I have been looking at a quote for someone who is in the cooling off period for an annuity he had signed up for when just before budget day. The rate is 6.43%; this means that he would have to be sure of 8.04% after his pot had been reduced by tax of 20% at best, and something extra would be necessary to compensate for the removal of the guarantee inherent in an annuity. Of course the added flexibility would be a compensation, but the decision is clearly not as straightforward as many are painting it, particularly for those with relatively limited assets.
    One hopes these points will all come out in debate; the danger, once the opposition supports a Government initiative, is that they won’t!

    • Roy Grainger
      Posted March 24, 2014 at 7:47 am | Permalink

      “Finally there is the question of the merits of the much maligned annuity. I have been looking at a quote for someone who is in the cooling off period for an annuity he had signed up for when just before budget day. The rate is 6.43%; this means that he would have to be sure of 8.04% after his pot had been reduced by tax of 20% at best, and something extra would be necessary to compensate for the removal of the guarantee inherent in an annuity”.

      Your analysis is flawed because you omit the key fact about an annuity that on death the capital sum invested goes straight to the insurance company. On average it currently takes about 20 years for an annuity just to pay back the money you originally invested.

  35. David Lonsdale
    Posted March 23, 2014 at 10:37 am | Permalink

    From an individual’s viewpoint, a sensible strategy would be to use pension money to buy property to rent. But this would push up house prices forcing more difficulties onto the young. Only 2% of the population, but 25% of MPs, are private landlords. Hmm. So who is disadvantaging young people I wonder? Oh yes, those who received grants for their education while bringing in loans for everyone else.

  36. Gary
    Posted March 23, 2014 at 12:44 pm | Permalink

    Is this pension change of heart really a sign that the govt has a new found trust in us?

    Forgive the cynicism, but it has been hard earned. I don’t believe the govt trusts us one jot. What is really going on here is the freeing up of pension capital to plunge into the property market to further Help The Banks(HTB)
    . With the ongoing govt/BoE Zero Interest Rate Policy(ZIRP), there is nowhere else to put the money.

    We saw from RBS, the banks are still hopelessly insolvent. The only reason we know about RBS is that we own their books.

    If the govt really cared about our savings and pensions it would allow rates to assume their market level by terminating QE and HTB. By failing to do that they reveal their true intentions. Nothing else makes sense.

  37. Roy Grainger
    Posted March 24, 2014 at 7:42 am | Permalink

    The objections of the likes of Tom Watson to these proposals are misguided. As you note John “the taxpayer” doesn’t lose out at all with these new rules compared to before, in fact they tend to front-load the government’s tax income from pension pots because any money withdrawn is immediately taxed at the pensioner’s marginal rate whereas if an annuity were bought the marginal rate would be applied annually over decades. Not to mention VAT/stamp duty/income tax if the withdrawn money is then used to make purchases or re-invested.

    His broader assertion that the government should be allowed to force us to spend our money “sensibly” would draw howls of outrage from him if applied to government benefits recipients.

  38. Jon
    Posted March 24, 2014 at 9:46 pm | Permalink

    I welcomed the announcement, though I think it will have less actual impact than people are saying.

    It was a big advert for drawdown. For drawdown you need a a sizeable fund but there is the benefit that whats left on death forms part of your estate to pass on. The negative of annuities is that on death it ends there, there is nothing after (unless a dependents pension but thats expensive). I see it as an encouragement to save, you can’t get drawdown without a decent pot.

    I like the fact that it has distanced some of Steve Webb’s ideas of collectives and the left.

    I would like MP’s pensions to become money purchase like the vast majority have so the legislators have a similar thinking. Steve Webb and the left idea of a a charge cap is changing things now already. Default funds choose a growth fund during the early and mid years. Investment analysts like to choose those with the best performance of returns against volatility. These analysts are currently rulling out the better performing funds in anticipation of the cap. This is a reduction in returns greater than the reduction in the charge. In short, its less of a pension pot for those in money purchase schemes.

    If MP’s had a money purchase scheme they may pay more attention to the value rather than the price. How many MP’s eat the “value” range from a supermarket? The cheapest of the cheap does not often deliver best value. In DC schemes the current trend is to go for cheap over best value and member outcomes. We want default funds that can deliver an extra 1% growth annually rather than a 0.25% cut in charges which delivers 1% less growth. If MP’s had a DC scheme it may focus the minds better for the millions in DC schemes.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page