Under 45? You’re being screwed.

“What do you think of Western civilisation?” A journalist once asked of Gandhi. “I think it would be a very good idea” he replied. I feel the same about George Osborne’s so-called pension ‘reform’. As I wrote yesterday, the Chancellor is not reforming Britain’s pensions industry. He’s unravelling it. But that’s not to say that we don’t need the kind of real change that could have been announced in the budget – we do. For too long, savers have been punished by a pensions industry that is too complicated, too unresponsive to the needs of retirees and too inflexible.

My friend Rachel Reeves, who is responsible for Labour’s policy on welfare and pensions, has worked tirelessly to expose the problems in the annuities market. She has written that £1 billion of pensioners’ hard earned money is lost every year by savers missing out on the best possible deal. That’s unforgivable and unsustainable. But the answer is to fix a broken and important market. Not to pull the rug out from underneath the pensions deal that protects individuals, families and the taxpayer alike. The kind of reform that Rachel has pushed for is what we deserve. A right to completely independent advice – so that everyone can shop around for the best deal. A cap on the fees – which are sometimes incomprehensibly steep – so that no-one has to fork over more than 0.75% of their hard-earned money.

And I would go further. If you have a pension pot that, once translated into annuity payments, would give you a return that is less than the Living Wage then you should be able to cash that in tax-free. Why? Because it doesn’t live up the pensions deal that is so important to securing our collective future – it doesn’t equip retirees with the salary replacement that insulates them and the taxpayer from risk.  So yes, reform. Urgently. But that is not the same as the reckless, cynical and calculating manoeuvre we saw from the Government on Wednesday.

You see, George Osborne is not reforming pensions. He’s robbing Peter (Generations’ X and Y) to pay Pauline (Baby boomer) in an effort to boost consumer confidence and create a feel-good, short-term boom in the run up to the 2015 election.

Millions of Baby Boomers will be handed a tax-free lump sum – to ‘buy a Lamborghini’ in the words of the pensions minister. That money has been built up in a partnership between the worker, the state and the employer – it has been specially protected and had special tax treatment. It is a shared pot that was designed to create collective resilience in our economy. Now, it can disappear over night and the people that have supported the creation of Baby Boomers’ pension wealth – Generations X and Y – who have helped to support and protect these pots of money through their taxes and through their own payments into occupational pension schemes are faced with the prospect of being punished. Whilst their parents are snapping up buy-to-let properties with their injections of easy, tax-free cash, young people are struggling to buy a home of their own.

And whilst some moral hazard has been negated by lifting the basic state pension above the means-testing threshold, a myriad of other services are on a needs-must basis – social care, for example – many more older pensioners will find themselves in poverty having spent their pot too early. The taxpayer will foot the bill.

The Chancellor has stolen from young people in order to finance a giveaway for what remains of his ‘core vote’. In doing so, he has threatened the deal between savers and the state on pensions. He has added fuel to the flames of a housing bubble that excludes young homeowners to the benefit of amateur slum landlords. He has betrayed young people by leaving them to foot the bill further down the road. And he has sought to fundamentally undermine the collective principle at the heart of our welfare state. I don’t oppose the Chancellor’s annuity policy because I’m on the side of financial services. I oppose it because I’m on the side of fairness, of responsibility and of principle ahead of low politicking. Reform is essential. But it’s different from vandalism. And that is what Osborne is guilty of with this budget.

If you’re under 45, you need wake up and smell the coffee. You are being screwed. The Labour party also needs to wake up and smell the coffee. These people are the future. They need us to fight for them. PS Here’s the Buzzcocks, dedicated to Steve Webb. [youtube]http://www.youtube.com/watch?v=rW49tFZPCF4&feature=kp[/youtube]

7 thoughts on “Under 45? You’re being screwed.”

  1. This policy only screws the young if older people buy second rental properties and then price the youngsters out of the market. There is a simple answer to this: lend people the money to buy their first home at base rates and then tax second home ownership at a punitive rate so all the buy to letters sell their second homes to the tenants. GO has helped old people not be fleeced by insurance companies – this policy would do the same to help young people not be fleeced by the banks and the old people.

  2. Tom, thanks for writing that – it’s taking a few days to dawn on most people what they witnessed, as is often the case with a larceny.
    This follows on from North Sea Oil, privatisation etc as another boost to the Golden generation, and another set of problems for their kids. Look carefully, and the proceeds from all the above are sat in properties, and it means your only hope is inheritance, which isn’t much of a fun thing to think about.
    Was very disappointed the 2 Ed’s don’t seem to have spotted it, but then it can’t be expected that they can suddenly understand a long-term economic picture, since they’re focused on not losing votes.

  3. Defined Contribution schemes have always been mis-described as “Pension Schemes”. They are no such thing. A DC scheme is an efficient SAVINGS scheme under which there are tax advantages for the saver and the basis of which is that both an employee and his/her employer contribute to the growing “Pot”. It was never the case that, except for the very highest earners that such a scheme would build up an adequate Pension – certainly compared with the Final Salary “Defined Benefit” scheme which they often replaced. Low interest rates means that the Annuity purchasing power of a DC pot was almost risibly low. The average pot of £25,000 buys a “Pension” of just £1400 a year.

    What the Chancellor has done is to allow the retiree to do what he/she likes with their pot. So instead of buying an Annuity they can do other things if they choose. They can spend all or some of the money. They can invest it in various investment vehicles – ISAs, Pensioner Bonds, Trusts etc. Its their call. They can, as the Chancellor said, also buy an Annuity and if interest rates rise so that Annuity deals are better that might be the better thing to do. But everyone is different and flexibility to do what you want is surely welcome?

  4. My husband worked from 15 yrs to 65 yrs never claiming unemployment benefit and paying tax and national insurance throughout that time.
    He paid into a private pension as he worked for a very small firm. When he retired his pension “lump sum” amounted to £18000. But he was prevented from taking this at it was a few hundred more than the inland revenue cut off point.
    As a result, he had to buy an annuity with a monthly return of £65, of which he lays £10 in income tax.
    He gets the basic state pension plus graduated pension amounting to £196 per week.
    It’s going to be many, many years before he gets his £18000.
    I’m going to keep him on life support until we get all our money back.
    It’s daylight robbery.

  5. Pretty soon the only “pension” many of today’s kids can expect will be what is left to them by their parents. Great if they lived in London/SE where the sale of the house will be a nice little earner. Not so hot in most other areas. Even a used Lamborghini doesn’t bring in much these days.

  6. Mr Watson,

    When you say millions of babyboomers are being handed a tax free lump sum to buy a Lamborgini, are you suggesting the average pension fund is nearer £744k rather than £30k (the former being the necessary sum to produce sufficient tax free cash to purchase an entry level Lamborgini) or are you just flinging incorrect figures around in the hope that some of them might stick?

  7. Well said. If pensions are no longer pensions then I’d like my share of the £360bn that has been paid to pensions over the last 10 years.

    I don’t want to get too technical but the flaws are often in the details….

    “whilst some moral hazard has been negated by lifting the basic state pension above the means-testing threshold”

    The trouble with the single state pension is that it requires 35 years of contributions to qualify. That’s fair enough, except many people will not qualify because they have been contracted out into their personal pension.

    Previously any contracted out payments were moved into a segregated “Protected rights” pot. This placed restrictions on what people could and couldn’t do when it came to retirement.

    Those restrictions were lifted about 5 years ago.

    So now anyone who was contracted out (and there are millions of them) will have a retirement fund that has been further inflated by more government contributions but as a cost has a sharply reduced entitlement to the single state pension.

    The latest reform basically hands over that contracted out government money to everyone at the age of 55 and they are entitled to do whatever they want with it.

    If they blow it they will have nothing more than the single state pension to which they will have a sharply reduced entitlement which will be BELOW the means tested threshold.

    So these pensioners will have their income topped up by the very tax payers that have been paying into their contracted out pension for the last 30 years!

    So we’ve paid for their pension in the past and we’re going to pay for their pension in the future!

    The government are keen to say what right minded person would build up a pension and then blow it all. I have a different question. What right minded person would not take the opportunity to grab their pension fund transfer it out of their estate (i.e. to a relative) and then claim free income from the state?

    The trouble is that this policy has several moving parts and it’s only when you try to bring them all together the take on the sort of co ordination normally reserved for a Norman Wisdom film (Baby Boomer reference). No wonder that IDS was on TV this morning failing to grasp the significance of the announcements.

    It will all unravel in time and you are going to struggle to find many politicians saying (with the benefit of hindsight) that they agreed with the policy. Sadly leadership often requires people to speak out before a feel good policy unravels and we are sorely lacking in that at the moment.

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