Why Labour HAS to oppose Osborne’s tax bribe over pensions

The annuities market evolved in the UK as an early example of the state, the individual and the private sector co-operating to protect one another from the everyday risks that we all face.  It’s a deal.  When you pay into a pension the state doesn’t treat that like it does other income or even other savings – it gives you special tax breaks, special rewards and special protections.  Why?  Because in the end, whilst saving for a pension protects you it also protects the wider community.  When you’re protected by a pension, that means that the taxpayer doesn’t have to pay out for you in later life.  You get an income when you get to a stage where you don’t want to, or can’t, work anymore.  The state gets a population of resilient and independent older people who have provided for themselves.  It’s of mutual benefit. David Cameron used to call this a ‘nudge’ policy. What the Chancellor announced yesterday fundamentally threatens that deal.  It says to the individual – pay into this pot, take the tax breaks and the special protections, then do whatever you want with it later on.  It’s a one-sided charter for tax avoidance that misunderstands why our carefully constructed mixture of the public and the private works for pensioners and works for the UK as a whole.  If there’s no special obligation on pension money – such as the compulsion that you use it to buy an annuity to protect your income and protect tax-payers from having to support you – then why should there be special privileges for pension savings? People will tell you that ‘it’s your money, you should decide how to spend it’.  The whole point is that it just isn’t that simple.  Yes, you paid in.  But so did the taxpayer.  And the government has every right, therefore, to ask that you spend it in the manner it was intended when we were stumping up the cash. George Osborne’s policy will come into effect one month before the next election.  Millions will suddenly be allowed to empty their pension pots.  Of course, most people will be cautious, careful and responsible.  But even so, the special deal between the state, the individual and the market will have been eroded.  Massive lump sums will be in the hands of individuals with all the everyday temptations and risk-taking that we all know so well.  And once that money is blown, it will be the wider community that has to pay. Labour, with its collective values and belief in mutualism must oppose these proposals at all costs.

13 comments ↓

#1 Joe on 03.20.14 at 12:19 pm

I agree with Tom, although the money is yours the state put money in too and therefore should be guaranteed to be spent in the way it was intended, it’s not socialism it’s common sense – protecting future tax payers.

#2 Diana Wright on 03.20.14 at 12:32 pm

But the ‘deal’ wasn’t working in practice. My husband had an annuity quote last year before he retired at 60. This promised him to repay the money he (and yes, the government) put in by the age of 86. If he had it inflation-proofed to any degree then it took him until he was 90 to get his own money back. Luckily he was able to take the whole pot as cash and it is invested.

#3 Danny on 03.20.14 at 12:43 pm

I understand the arguments. But annuities are a scandalously bad product that only survive because there’s compulsion to buy them. A <3% indexed return for a single person retiring at 60. So someone with a pension pot of £100k gets just £3k a year.

And when you die all of your money disappears even though the insurance company keeps the assets they bought with your money.

#4 Alan Royston on 03.20.14 at 1:06 pm

As always the devil is in the detail, and therefore before jumping up and down with joy, those nearing retirement should be very careful indeed. The urge to jump for that cash may end up in a disastrous situation for many. I do agree that this money should be used as intended, a pension for life.
I firmly believe that buying an annuity is a precarious business and therefore everyone should be offered free and truly independent advice. This I think would be a good step. The temptation to grab the pot may be overwhelming for some, especially when the pot is small. Spending the lot may prove too much of a temptation for many, and then what.

#5 Steve on 03.20.14 at 1:25 pm

Yes but this misses the point, the annuities market was and is broken. People getting 4%annuity rate meant something had to be done.

The answer is more than a protection of status quo, it’s introduction of a single government scheme similar to Australian system where all irrespective of casual or permanent contract pay into scheme percentage along with employer with guaranteed return of pension in retirement.

Osborne proposal will bankrupt schemes, think about all the unclaimed pension monies from people dying early … No more.!

Time for a new national debate on pensions.

#6 ethicalstrategy on 03.20.14 at 3:03 pm

An interesting view, but…

People won’t be able to just take the cash. They will have to pay tax on it.

Leaving pensioners at the whim of the markets and the economy when it comes to buying their annuity is ridiculously unfair.

Assuming that everyone will take their pension pot as cash is flawed. Those who have had the discipline to save will not be looking to squander their money. The people who would be most likely to do so won’t have built up a pot in the first place.

There is no benefit to taking your pot as cash from an income perspective. it would be better to leave the money invested in your pension and draw your income from there. Otherwise you pay tax when you take your cash pot and then again on the income that is subsequently generated.

Overall, it makes sense.

#7 Jane on 03.20.14 at 3:39 pm

I am rather confused by this article.

Over the last decade annuities have not been worth much because of low interest rates and the fact that people are living much longer. I am aware that other countries have also rid themselves of annuities, Australia and Denmark to name a few. I have also read a report from the FCA published earlier this year which points up many problems including very poor value and the difficulties imposed in seeking the best deal.

I am also aware of the “moral hazard” involved in removing the necessity for these annuities. Suggestions that people will go on a spend or buy property to let to name but a few.

Somehow those that are not employed by the State and who pay into a pension pot to protect themselves in later life are very unlikely to go on a spend and have to rely on pension credit which is a pittance anyway. I do think that some may purchase property to improve their income as rental will bring in greater rewards. I know many who have done this to make up for the downfall vis pension expectations and the reality. Returns have halved in the last decade.

Your argument is that annuities were a pact between the government, the private sector and the taxpayer. However, the taxpayer did not expect a financial crisis – resulting in low interest rates, had no part in the governments poor regulation of banks which made the UK’s situation worse. Further, the private sector has not met expectations. It reminds me of many years ago when I first had a mortgage and was compelled by the mortgage lender to take out protection in the form of an insurance policy from a company that they chose. Now with technology, I realise what a scam this was as I could have achieved a better deal on the open market. Further, the taxpayer subsidises those with mortgages as well as many other areas.

Moral hazard exists and will always do so. I elected to save for retirement so that I would not be a burden on the State. My friends who had the same opportunities that I had, elected to have more holidays and change their cars regularly etc. It was their choice and they knew that in retirement they would be the poorer.

As to the burden on the taxpayer. It seems wrong to me to just a associate this with annuities. I have been fortunate and have never had to rely on unemployment benefits, have never been in hospital etc etc It follows that I as a taxpayer could bring the concept of “moral hazard” to all welfare recipients, to the obese, to those who smoke etc etc. Their actions cost me as a taxpayer additional funds. It is wrong that you differentiate.

.

#8 john on 03.20.14 at 3:54 pm

The most sensible article i have read on Osborne’s ”pension revolution”. I predict that in a few years time we will have another mis selling scandel, with financial advisors giving bad advice on what to do with pensioners pension pots.

#9 Neil Nerva on 03.20.14 at 9:06 pm

Tom
Thanks for speaking out on this issue – hope front bench follows
Two questions
1 How does these changes impact on Dilnot and DWP rules re “deprivation of resources” ?
2 What made Steve Webb go in a month from making a reasonable critique of current rules for annuities to becoming an opponent of annuities ? This artcle was only published in Feb 2014 http://www.telegraph.co.uk/finance/personalfinance/10586196/Pensions-minister-Annuities-need-a-rethink.html

#10 Jeremy burns on 03.21.14 at 9:34 am

You still have to pay tax when you withdraw the money – how many times do you want the person to pay tax ?

#11 Chris Lewis on 03.22.14 at 8:30 am

Well done Mr. Watson for being prepared to speak the truth about this.

Without annuitisation, the private pension scheme becomes merely a massive tax avoidance scheme for the well off. The average pension saver will save about £3000 in tax by investing in a pension over their lifetime; the super high earner will be saving £16000 each year. Without annuitisation, this is just a gift from the government (possibly paid for in part by cuts!)

In terms of investment, this is another example of George Osborne’s incredibly short-term focus. A boost in short-term tax and (possibly) in electoral popularity means that he is prepared to turn a blind eye to longer term impacts e.g. a lack of funds seeking long-term investment and hence higher interest rates for government and corporate borrowers. I suspect the insurance industry’s promised £25 billion investment in UK infrastructure that the Treasury boasted of as recently as December was dependent on annuity premium, and will now dry up.

#12 Chris Lewis on 03.23.14 at 8:09 am

Well done Mr. Watson for being prepared to speak the truth about this, despite the media reaction to it.

Without annuitisation, the private pension scheme becomes merely a tax avoidance scheme for the well off. The average pension saver will save about £3000 in tax by saving in a pension over their lifetime; the super high earner will be saving £16000 each year. Without annuitisation, this is just a gift from the government to the well-off (perhaps paid for by cuts).

In terms of investment, this is another example of George Osborne’s short-term focus. A boost in short-term tax and in electoral popularity means that he is prepared to turn a blind eye to longer term impacts e.g. a lack of funds seeking long-term investment and hence higher interest rates for government and corporate borrowers. I suspect the insurance industry’s promised £25 billion investment in UK infrastructure was dependent on annuity premium, and will now dry up.

#13 Julian Kavanagh on 03.26.14 at 12:04 pm

I don’t agree at all with your post – we have a different view around the relationship between the state and the taxpayer – but your point about tax breaks is interesting. It must surely be the case that, if the individual is now not required to purchase an annuity, that the case for having those tax breaks is weakened. I can see future governments, right or left, looking at those tax breaks and, at the very least, removing them for higher rate taxpayers and probably going further.

As an aside, I think you’re wrong on this because it must still be in the interest of most people approaching pensionable age to purchase an annuity. This move should force the annuity providers to think more carefully about the products they offer. If the annuity market had been working and been providing decent returns, this reform would have been unnecessary.

Leave a Comment

Protected with IP Blacklist CloudIP Blacklist Cloud