Saturday, January 31, 2015

In England a storm is brewing about new pension reform

As posted in the Guardian
George Osborne has a fatal flaw. He's too clever by half. Remember the "pasty tax" that became the emblem of his omnishambles budget? That has faded from memory. Not so the "bedroom tax". Remember how popular that was with Tory backbenchers when announced? It now dogs them. But surely Osborne has one unalloyed triumph from his four budgets – pension reform. His announcement of the abolition of the requirement to turn your personal pension pot into an annuity at age 65 gained near-universal acclaim. A handful of critics pointed out that pension reforms rely on consensus, evidence and consultation. And then everything fell silent. The chancellor probably thought that he had won the argument.

But, as in the classic westerns, he should have been worrying that it was "quiet, too quiet". There is a storm brewing. At a recent event held by the Fabian Society and Just Retirement, pensions experts from academia, politics, the industry and NGOs all expressed concerns – at times anger – that the Osborne changes are going to lead to poorer pensioners, more pressure on the housing market, a bad deal for women and a windfall for Treasury. Not such a triumph after all. Pensions are notoriously complex, but the growing problems with Osborne's changes are easily sketched.

First, contrary to Steve Webb's flippancy about Lamborghinis we know that the biggest risk in retirement is over-saving not over-consumption. Most pensioners continue to save after retirement, though there is little economic sense in that. If they cash out their pension pots, as Osborne expects, very many pensioners will put their money into a basic interest-bearing account which gives them a very poor return. In a cruel twist, retirees will lose even if they try to do the right thing. In his budget speech, the chancellor promised they would get pensions "advice". This has been weakened to "guidance" but will still cost money. Where will that come from? It will be charged to their pension pots and eat into their already modest savings. Poorer twice over. But the Treasury will be fine – the budget papers anticipate billions of extra revenue as retirees take cash not an annuity.

Second, those pensioners who want a safe place for their savings to grow and return an income to them will be drawn to "buy to let". This will create more demand and drive house prices and rents higher – which will, perversely, reinforce the choice of property as a savings vehicle. Finally, Osborne's changes have delivered a huge blow against equality. For years campaigners fought for equal annuities for men and women. This has been achieved. Previously women got a lower income from the same pension pot – the financial services industry punished them for greater life expectancy. At a stroke this hard-earned gain has been erased. The end of the current annuity market is the end of that. Women are already disadvantaged hugely in the current system with half as many women as men being auto-enrolled into pensions. For many it will be the new flat-rate state pension that they will rely on in retirement. This is the far-from-princely sum of £7,700 a year. Not only is that as nugatory as it looks, it is much less than people expect to live on in retirement. And that, remember, is what pensioners will live on for more than 20 years – nearer 30 if they are women.

In the end, that is what pensions policy should be all about. Not freedom and choice but a guaranteed income in retirement that provides dignity and independence. We will get back there – either quickly if politicians come to their senses, or slowly as the painful and unequal consequences of Osborne's changes are felt.

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