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Budget 2014: George Osborne’s pensions revolution

19 March 2014

This will take a while to sink in – we simply have never seen this before in a Budget. George Osborne has just revolutionised the way pensions work; millions of people will have just found their pensions pot turned into a bank account. The punitive 55 per cent tax rate they faced if taking out more than they should from a pension has been abolished. And how much does this cost Osborne? That’s the beauty.

No wonder the Chancellor’s aides were briefing that he’d found a very radical, very ‘clever’ policy. This will make a massive pre-election difference to pensioners, the group most likely to vote at the next election. This bung to Tory target voters will be off-radar to the IFS and Labour because those guys only compute tax and spending changes – not welfare or savings. Osborne moves in their blind spot.

Is it a bung? ‘It’s a matter for people to choose how they spend their money,’ chirped Danny Alexander afterwards – but the Treasury’s forecasts assume that they will spend, spend, spend. If they can pull cash out of their pension, and only pay a normal rate of tax, HMT reckons it’ll haul in £320 million more tax in 2014-15 rising to an almighty £1.2 billion more in tax by 2018-19.

Osborne is, quite literally, banking on a pensioner spending splurge. And politically, what a nice contrast for him. Brown tried to get rich by raiding people’s pension pots. But Tories try to raise cash by allowing pensioners to unlock it, pay lower tax on it, then go shopping.

You can see why help is needed for pensioners. Since the crash, interest rates have been nailed to the floor as Tory and Labour politicians sought to keep Britain on the methadone of underpriced debt. Savers and pensioners were unintended victims. Those forced to buy an annuity found themselves poorer, forever, because the annual payouts (set for perpetuity) have collapsed.

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The device of an annuity became a trap. Pensioners ‘have seen their savings eroded quite dramatically,’ said Danny Alexander. You can have saved £400k – no small feat – and find it only buys you £15k income a year. It would be a scandal, if more people knew what an annuity was.

Osborne has today said people can draw down the whole pension, and don’t need to buy an annuity. This will be a huge relief for the 400,000 a year who were dreading being forced to do so. And the rip-off annuities industry has just seen the bottom fall out of its market. Good.

And the voters! Oh, the voters. I can instantly think of about a dozen people I know who will be massively helped by this: not the rich, but pensioners living on a pretty low daily amount, who have cash locked up in a pension that they can’t draw down. Now they can. Pensions who will be delighted that a new Bank of Osborne is to offer 4% interest on deposits – better than any bank. Tens of thousands will be writing cheques – and finding themselves with a reason to vote Tory.

The reason that pension pots have been restricted, the reason why you can normally only take a quarter of it out tax-free, is so you don’t spend the whole thing and end up relying on the state. So Osborne’s plan is fine for now, but what will it mean for a pension in ten years’ time? A cynic would argue that Osborne doesn’t care about ten years’ time. That he’s thinking about ten months’ time, when pensioners’ houses will be full of extra stuff they have bought – just in time for the election.

But personally, I think Osborne is right to argue that pensioners should be trusted to judge this for themselves. It’s a supply-side reform, a liberalising measure. It recognises the pain caused by the annuity massacre, and the trap that savers are in. It’s a vote of confidence in people’s own ability to go easy on their own pension pile – but that’s my instinct. I haven’t studied this, I haven’t seen how this has worked where attempted (if attempted) abroad. Even Ed Balls isn’t passing comment – we’re all in new territory.

And that’s what unnerves me, and gives me lingering reservations about this.

Until now, the UK pensions system has not been a political football. Sure, Gordon Brown would mount a sneaky pensions raid by taxing shares. But people today – even teenagers – invest in a pension on the basis that they know the circumstances in which they can take the cash out in 10, 20 or 60 years time. Osborne’s move today means no one can now be sure about the circumstances in which the state will allow them to move their cash. Osborne has ended this certainty. My instant thought was that a Labour chancellor could put a cage around pensions pots, now that Osborne has established this as a budget manoeuvre.

And Osborne’s offer of giving pensioners 4 per cent a year on their savings is, of course, mad. It’s outright bribery, and had Ed Miliband proposed this citing ‘market failure’ he’d be denounced as a Marxist. He should be radical with what he’s paid to operate, the tax and spending system. But he should not be trying to re-engineer the saving and banking system, with fake banks offering over-the-odds returns (which will provide stiff competition for real banks trying to repair their balance sheets).

My final problem: a change in pensions on this scale should have been put out to open consultation. You can’t just spring this as a Budget manoeuvre for the sake of drama – there is too much at stake. After all, the law of unintended consequences is one that Westminster always unwittingly passes.

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  • littleoddsandpieces

    The Tories aided and abetted by the Lib Dems, with the Lib Dems being the Pensions Minister Mr Steve Webb,
    have abolished the state pension from next year.

    The flat rate pension is
    STARVE IF YOU CAN’T forever in old age.

    See why at end of my petition, in my WHY IS THIS IMPORTANT section, at:

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  • Sarah Miller

    Interesting post. I’m sure many people are now considering personal plan options because of such news. Readers can get more ideas about this option on

  • Jackthesmilingblack

    That piece of $hit Gordon Brown; a 12-gauge up his donkey, right?

  • stu

    will I still be able to take 25% tax free then pay normal rate of tax, 20% or 40%?

    • factsandfigures

      Thats the idea? If on benefits would also have an affect to income support received, any savings over £16k would be taken into further consideration by thr local authority, carenis capped around £23,500.

      or all combined income subject to the according rate and tax allowances within that financial year?

  • greg

    So, if I’m reading this correctly, when I am 55 I can take all of my pension (only about 30000) and pay off a big lump of my mortgage rather than take a monthly pension which would only give me around 25 pounds a month.

  • factsandfigures

    Did I read that £20m will be made available for transition? refers consultation link.

  • factsandfigures

    @Frazer Nelson, what is excluded is the saving also made by the dwp and treasury as pension incomenis deducted from income support received by those entitled to benefits will also effect these figures?

    Also a review of the 55% Death Tax introduced in the Finance Bill 2011, is also welcomed to be in line an average pension pot of £30k?

    Increasing the trivial sum, a welcomed move? The treasury already spends some £28bn per year as tax relief to paid contributions?

    Your comments?

  • anyfool

    This should be back dated to 2008, I am one of the unlucky ones who had their pension pot raided by that creature Brown, then I had the bad luck to retire last year when annuities have never been lower.

  • Rockin Ron

    ‘Osborne is, quite literally, banking on a pensioner spending splurge.’
    Well most of the spending will be on care costs.

    ‘I can instantly think of about a dozen people I know who will be massively helped by this…’
    A real game changer then.

  • Kitty MLB

    May I just add this will help pensioners and future pensioners who
    were facing very poor returns on savings and facing the prospect
    of their pension funds being locked up in poor value annuities –
    The look on Ed Balls face was priceless- a deflated red balloon.

  • Kitty MLB

    Excellent George Osborne, a real Conservative budget, from a strong and capable and determined
    Conservative chancellor who is showing the potential to be a Iron Chancellor
    as others have described him- he has grown into this job.
    A budget for pensioners, savers, and pension savers- as well as saving the
    Remember people what Labour id to your pensions- never trust them again.

    • Shazza

      Yup Kitty. Pensions – just one of many institutions destroyed by


      I will never, ever tire of repeating this.

  • Baron

    Fraser, would you be kind and enlarge on how this is “a supply-side reform, a liberalising measure”, please. You think, perhaps, the pensioners will start new businesses, lend the released cash to businesses new or old, or what?

  • Bert

    Keep your own money? Madness it’ll never catch on.

  • Magnolia

    Didn’t he say something about needing an Act of Parliament about some of these pension changes which implies that he will need the consent of the House and might that not also mean that they are part of a trap laid for Labour in addition to the one about the overall welfare cap?

  • Mike Barnes

    So you can get at all of your pension when you’re 55, spend it all before you’re 65 and then live off the state pension and means testing until whenever you die.

    Fantastic stuff. Free money for everybody who is grey and votes Tory. He’s literally paying Ukipers to come back.

    • Shazza

      I would imagine that for the majority of these pensioners that this will affect, will be responsible people who have saved into these pension schemes to provide for their old age. I really don’t see the majority of them going out on a massive one time splurge. It gives them more flexibility. Osborne is allowing us to actually be grown ups and take responsibility for ourselves unlike Marxist Ed and comrades who believe they know better than us and nanny state should call the odds.

    • Talwin

      MB, you may be right; but it may also be the case that people who have been wise enough, or disciplined enough, to save for donkeys’ years will not be inclined to p..s the whole lot up the wall as soon as they get hold of it.

    • ivor phillips

      Luckily for me I have been holding off taking my annuity, even though that has cost me money,
      But after saving for 45 years to be told that I could expect half of what was guaranteed in 1992 and feeling that I was being exploited big time, but unable to do anything about it,
      If you think after all these years saving that a pensioner is going on a big splurge then you are mistaken, I planned for my retirement hoping to take things easier financially, then effectively being told that I need to live to 90 to
      Just to recover the money they have of mine! That’s so wrong on so many levels!
      I had enough intelligence to save I also have the intelligence to SPEND MY MONEY WISELY

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