In short, George Osborne delivered another take-away Budget, but with a few crumbs to offset the blows to older people and savers.
The big shock was the stealth tax for five million of Britain’s middle class pensioners. Any pensioner with income between around £10,000 and £24,000 a year will pay more tax in future than they would have done without this change.
The Chancellor says this will “simplify” the tax system – and it is true that the age allowance is very complicated – but the reality is that this is just a revenue-raising exercise.
People reaching age 65 in the next couple of years will be £4 a week worse off as a result of this measure. If their state pension had been reduced by £4 a week there would be uproar, but abolishing the age allowance has a similar effect – although only for middle income pensioners.
The very poorest and very wealthiest are not affected, because the age allowance is phased out once older people’s incomes reach £24,000 a year.
As such, it is the decent middle income pensioners who worked hard, and saved hard, to have a bit of extra income in later life – the very people that we should be valuing highly – who are hit.
The Office for Tax Simplification report did point to the complexity of the age allowance, but recommended that, if it were removed, other measures could be introduced to offset the income reductions for pensioners. The Chancellor chose not to listen to this.
This is compounded by the fact that there was nothing in the Budget to help savers, especially older people trying to live on the income from their savings.
The policy of ultra-low interest rates for the last three years, has hit savers hard. At the very least, the Chancellor could have relaxed the restrictions on ISAs that mean older savers cannot put their full annual ISA allowance into cash savings. At present, only half can be in cash, with the rest having to be put into more risky shares or bond investments.
The Chancellor should allow older savers, who may not be able to afford to gamble their lifetime savings on the stock market, more flexibility to decide what type of savings are best for them, rather than being denied a choice and forced to take risk in their ISA.
More flexibility and choice would be far better for older savers, helping to offset some of the damage done by ultra-low interest rates and would have softened the blow of the abolition of the age allowance. Allowing people to keep more of their meagre interest income tax free would be far fairer than adding insult to injury by taxing them even more!
There was also no announcement about new incentives to help people save for later life care needs either. It seems that savers simply do not matter to the Government. The message it is sending to the population is that those who save are valid targets to take money from, while borrowers are baled out.
I’m also disappointed there was nothing to mitigate the damage caused by Quantitative Easing and high inflation – annuities, income drawdown and pension funds all continue to be hit with no relief in sight.
Yet there is precious little evidence that Quantitative Easing (the Bank of England’s policy of creating billions of pounds of new money to buy up Government bonds) has actually stimulated the economy, but there is plenty of evidence that it has done dreadful damage to pension funds, pensioners and annuities.
By buying so many gilts, the Bank of England has forced long-term interest rates down, but has not kick-started huge amounts of help for the small firms that are the lifeblood of a growing economy.
QE was meant to be a “temporary” policy to avoid economic meltdown and stimulate the economy. Unfortunately, the policy is still in place, even though deflation and depression are no longer on the horizon.
In fact, this temporary policy has permanently impoverished over a million pensioners already, with more facing the same fate each week. Nearly half a million pensioners buy annuities each year, and the lower the interest rates on government bonds, the lower annuity rates fall and the less pension income people will receive for their pension savings.
Since QE started, annuity rates have fallen by 20 per cent, so pensioners face a fall in their lifetime pension by a fifth – and this is a permanent reduction, because once the annuity is bought it can never be changed. In addition, the annuities being bought are almost all “level” annuities, which offer no protection against inflation. The income stays the same for the rest of the person’s life. Therefore, the current high levels of inflation are continuing to whittle away these pensioners’ purchasing power.
Yet the Chancellor continues to consider very low Government bond yields as an unalloyed benefit for the country.
This is not the case. Annuity rates have fallen by a fifth, inflation for older people has risen by over a fifth and pension deficits have increased by more than £90bn, largely as a consequence of QE. Measures to help alleviate these problems are needed urgently before our pension system is further undermined.
Despite this, there was some positive news. A long overdue and very welcome announcement was that there will be radical State Pension reform. This is great news and there will be a consultation later on a flat rate state pension of around £140 per week, above the means-testing level.
This would merge the Basic State Pension with the State Second Pension in future and this new state pension will still be based on contributions paid in, finally moving us towards a system without mass means-testing for pensioners. Of course, we need to see the details when the consultation comes out, but if introduced correctly, this measure could end the penalty suffered by those lower income pensioners who save for retirement or try to keep working in old age and find they lose much or all their extra income in the means-test.
Another welcome announcement is that the Chancellor will be using pension fund assets for major national investments.
I would hope that many pension funds, not just the 12 already working with the Treasury on this, will be able to join in.
Infrastructure projects, if successful, can offer inflation-linked returns and some capital appreciation for investors, which is an ideal return profile for pension funds.
Coincidentally, the reason we have so much money in pension funds is the result of people saving for retirement in the past. We must recognise the value that these assets bring to our economy and not take for granted the value of long-term saving.
Policy-makers please take note. Borrowing will not provide sustainable long-term growth – we also need to encourage saving and investment.