George Osborne, who today announced a complete overhaul of the pensions industry ©/PA Wire/Press Association Images
Read more in-depth analysis of this year's Budget in Prospect
George Osborne's Budget speech was the last but one before next year’s election. The silence in the run up to it was deafening—not a leak, or a squeak emerged ahead of today’s announcement, in sharp contrast to previous Budgets where leakages have caused the Chancellor significant problems. Perhaps having learned from the past, Osborne kept today’s details strictly under wraps. It did not disappoint: today he announced that the pensions industry is to undergo a complete overhaul.
It must have been tempting for the Chancellor to wheel out a big, populist tax cut or give-away. The ability to engineer instant popularity is a gift given to very few and the Chancellor is one of them. As usual for a Budget, the atmosphere in the Commons was charged. The Office for Budget Responsibility sweetened the Chancellor’s message substantially by upgrading its economic forecast for growth in 2014 to 2.7 per cent, which Osborne termed “the biggest upward revision to growth between Budgets for 30 years.” Later this year, he continued, the UK economy would finally exceed its pre-crash level and what’s more, Britain now has a greater employment rate even than the United States.
So far, so sunlit uplands. But then Osborne cannot be too rosy in his outlook, as this risks undercutting his case for austerity. And so the speech also made clear the need to stay the course on cuts. Borrowing is coming down, from its peak of £157bn to a level this year of £108bn, dropping like a stone until the moment in 2018-19 when Britain will not be borrowing at all and when “we will have a small surplus of £5bn.” His own benches loved this. As for fiscal policy, his stance was best encapsulated in the line: “in addition to cuts this year and next, there will be cuts in the next parliament too.”
There were revisions to Stamp Duty, to business investment allowances and a good, though slightly convoluted joke about next year’s 800th anniversary of the signing of the Magna Carta, which he portrayed as the story of: “A weak leader who had risen to the top, after betraying his brother, compelled by a gang of unruly barons to sign on the dotted line.” The reference clanged out across the chamber—the Labour front bench froze in Mount Rushmore-like indignation. There were also announcements on: infrastructure spending—more of it; tax avoidance—less of it; manufacturing—more; duties—less.
On tax, the income tax threshold will rise to £10,500, meaning that nobody will pay tax on earnings up to that point. The higher rate tax threshold will rise from £41,450 to £41,865, a trivial increase that was perhaps a sop to the Tory grandees who last week did the media rounds to urge such a change.
And then he came to savings, and to the biggest announcements of the day. First, the 10p rate for savers will go, meaning people will small amounts of savings will pay no tax on interest earned. Cheers from the Government benches. Second, ISAs will be reformed. These are individual savings accounts available on the high street, which give tax free interest. Everything earned on your money, you keep. These vehicles have taken on added significance in the years following the crash, as the Bank of England has engaged in zero lower bound economics, cutting rates to an effective zero per cent, meaning that savers have found themselves earning nothing on their cash. Today Osborne completely overhauled ISAs. Formerly they came in two flavours—cash ISAs, and stocks and shares ISAs. That distinction will go. There will be one type. What’s more, this New ISA will have an annual limit of £15,000. The former limit on a cash ISA was £5,500. It’s a substantial increase and one that should help the national savings ratio to head back upwards.
But bigger than this was the announcement on pensions. Osborne announced a reduction in the tax rules around pensions and a relaxation almost to nothing of the access that savers will have to their personal pension pots. “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want,” he said.
“No caps. No drawdown limits,” said Osborne, before adding: “Let me be clear. No one will have to buy an annuity.” This will have huge significance for savers, as my colleague Andy Davis points out here.
It also substantially changes the character of the pensions industry. The industry has always been a vast repository of savings and wealth, which has in turn been used to make investments in business and industry.
But today’s announcement introduces an element of uncertainty into the pensions industry. Previously, pensioners were bound to their pension agreements. Now, whenever they wish, they may withdraw their money and walk away. The industry will now have to include in its calculations this highly significant change, as companies face the possibility that each year a lump of their cash will vanish. The share prices of pension providers and insurance companies dropped on hearing this news, Legal and General's, at one point, by almost 13 per cent. One of the most critical elements of Britain’s economic landscape has been changed—the unintended consequences will be substantial.
Pensioners are a traditional source of Conservative votes and so these reforms make political sense. But this was not the stuff of an all-out popularity contest. Presumably Osborne will keep his biggest performance for next year’s Budget, which will come barely two months before the General Election. Today’s news was big, but the Chancellor has not yet broken into a sprint finish for the electoral line. He is biding his time.
