Tag Archives: pension reform

Blue-rinse budget

The budget presented by George Osborne this week was as concerned with politics as economics. Ironically, given Osborne’s professed loathing for him, I think it also had much in common with Gordon Brown’s later budgets. Remaining (supposedly) fiscally neutral whilst shifting monies around in a way that benefits your target voters – a fiscal carousel with some sweeties thrown to one side and pebbles to the other.

 

The political motivations for the budget are, like so much Tory posturing of late, compelled by their fear of the UKIP threat. The reforms to pensions and ISA’s are squarely aimed at the Home Counties grey vote. This key Tory demographic is the vote that they fear is being lost to the Farage’s golf club bonhomie and supposed straight-talking.

 

The pension reform is a massive decision. I am sympathetic to the argument that people should be allowed more freedom and choice in how they deal with their own affairs in retirement. The annuity market at present is also not working in the way one would wish.

 

My concern stems from several things. Firstly, governments’ track record in pension reform is about as successful as Grant Shapps’ tweets. The fact that this policy has been rushed out for the budget is rather worrying given that it has extremely long-lasting implications for the public finances. This is clearly a policy that should have been subject to the utmost scrutiny as opposed to scribbled on the back of Osborne’s fag packet.

 

Secondly, it must be borne in mind that there is a difference between a pension and savings. The state has offered favourable tax treatment to promote pensions as it means the person saving for their pension will not have to be overly reliant on the state in their dotage. The liberalisation of pension access does raise some questions over this incentive and what happens if the person who accesses their pension early is left, for whatever reason, reliant on the state?

 

Thirdly, without proper regulation there could be a lot of room for many sharks in this brave new world and people could lose catastrophically. It is worth remembering the grotesque mis-selling scandal that arose from previous pension reform.

 

It seems the government has rushed out a policy for headlines when it should have been more thoughtfully implemented. The decision is underpinned by a belief that personal choice is always beneficial – this assumption should have received greater scrutiny than appears to be the case. Choice can be beneficial but only within the right framework and I remain far from convinced that sufficient work has gone into developing the framework for this far-reaching decision.  

 

The liberalisation of ISA’s is also fundamentally not a bad thing. To encourage savings at a time when the household savings ratio continues to dwindle is reasonable. My concerns here are the fact that it flies in the face of previous policies. This suggests it is not borne of entirely pure motives. More importantly, it is ultimately irrelevant to the vast majority of people who are not in a position to utilise this offer. It is like granting people permission to fly to the moon – it would be nice but is meaningless to most people. The government would be better off focussing resources on policies for the majority.

 

It would argue that raising the personal allowance is the way in which it is helping ordinary people. This is partially true. The raising of the allowance beyond this point does not affect the lowest earners. The lowest paid 5 million workers earn less than £10,000. To truly alleviate the tax burden on the low paid the national insurance threshold should be raised.

 

What is perhaps most worrying though is the chancellor’s willingness to engage in a grand form of temporal teeming and lading. He is handing out actual tax cuts happening now that are being opaquely funded by unspecified future spending cuts. This makes it likely that the cuts when they come are going to have to be even deeper and more painful than anything that has happened as yet. The social ramifications of this could be enormous. If one adds to the mix asset price comedowns as the Bank of England unwinds quantitative easing then the overall picture remains troubling.