Osborne hails retirement funds

Updated: 

Budget 2014

George Osborne has defended moves to allow people to cash in their retirement funds, insisting they should be "trusted" to make the right financial decisions.

The Chancellor said his Budget yesterday had acted to help "responsible" pensioners who had been getting a bad deal from annuities.

He also ducked criticism of a Tory advert claiming cuts to duty on Bingo halls and beer would "help hard-working people do more of the things they enjoy" - accusing Labour of whipping up a row to distract attention.

Mr Osborne said the introduction of the new single tier pension had made the reforms possible by guaranteeing people a level of income.

"What I would say is that people who saved their whole lives, saved for a pension, these are responsible people," he told BBC Breakfast.

"For many people annuities have not been good value... I want people to be trusted to make decisions about their future."

He said the shake-up, which will allow people on low incomes to draw down their funds without paying punitive tax rates, had been welcomed by a wide range of consumer groups.

Speaking on BBC Radio 5 Live, Mr Osborne dismissed suggestions that he was hitting teachers, nurses and train drivers by reducing the threshold for 40p income tax in real terms.

He said such people were all "part of a hard-working nation", and insisted those on middle incomes were still benefiting from the rise in the personal allowance.

But he added: "For the whole country it has been a difficult period. That is what happens when you mess up your country."

The radical Budget package will see people given free financial advice, and allowed to draw down as much of their defined contribution fund as they want, even if they are in line for relatively small incomes.

Instead of being hit with punitive 55% tax on sums they extract from funds, they will instead pay normal tax rates.

A new state-backed Pensioner Bond will help people who have suffered low returns since interest rates were slashed to keep the wider economy afloat in the wake of the crash.

Up to £10 billion of the bonds will be issued to as many as one million pensioners, who will be able to save up to £10,000 at interest rates likely to be 2.8% on the one-year version and 4% if they lock in for three years.

The cash and stocks elements of Isas will be merged into a larger tax-free vehicle, with savers now allowed to stash up to £15,000 a year in whatever form they want.

The cap on Premium Bonds will also be lifted from £30,000 to £40,000 in June, and to £50,000 next year. And the 10p starting rate for income from savings would be abolished, benefiting 1.5 million low-income savers.

Mr Alexander acknowledged that the greater flexibility on access to pension pots could lead to some people squandering their savings.

He told BBC2's Newsnight: "I think people who save for retirement, people who have built up a pension pot, are responsible people who the state should trust."

But asked whether they could blow the money on holidays, he said: "I think that's unlikely, but it is possible that someone could do that, but that would be to their own detriment.

"Of course, if they chose to do that they would be taking rather a large pension pot in one go and therefore paying more tax as well."

The Budget measures will come under independent scrutiny today as the respected Institute for Fiscal Studies presents its analysis of the tax and spending measures announced by Mr Osborne.

Lib Dem pressure to raise the personal tax allowance to £10,500 a year paid off, but Mr Osborne resisted calls from Conservative backbenchers - and two Tory ex-chancellors - for a significant increase in the 40p income tax threshold, which rises more slowly than inflation to £41,865 next
month and £42,285 in 2015/16.

With "grey voters" more likely than other age group to go to the ballot box, critics accused the Chancellor of a politically-motivated statement designed to appeal to "blue rinses not blue collars".

Hailing the success of the coalition's austerity programme, Mr Osborne said UK plc will grow by a better-than-forecast 2.7% in 2014 and the Government will be back in surplus by 2018/19.

He also set up a political battleground for the May 2015 election by announcing a £119.5 billion cap on overall welfare spending, excluding the state pension and jobseeker's allowance.

Labour announced it will back the policy in a Commons vote next week, but with the Chancellor already seeking £12 billion further welfare cuts after the election, it seems all but certain that the Tory manifesto will promise to reduce the cap, forcing Labour and Liberal Democrats to say whether they will do the same.

Shadow chancellor Ed Balls told BBC Radio 4's Today programme: "George Osborne is such a tactical politician that everything has got to be a trap and he announces for six months that he is setting a trap and then he gets a bit frustrated that we don't walk into it."

Mr Balls said "more flexibility and choice" in pensions was to be welcomed but that it was "important that we look hard to see what it's actually going to mean.

"Will there proper protections and proper financial education so people don't make the wrong choices and end up running out of their pension pot well before their retirement ends?" he asked.

"And will it become a way in which people can save substantial amounts of money tax advantaged, take it out at retirement and then use the money essentially to avoid tax?"

Mr Balls said there was little for him to disagree with in the Budget because "it was such an underwhelming Budget" that had a "huge hole in the middle".

"Where was the action to help families who can't afford to save at the moment?" he said.

"Where was the action to tackle youth unemployment? Where was the freeze in energy prices?"

Housing was another "big missing item", he said.

IFS director Paul Johnson said some people would lose out with the pension changes but assessed that overall they were probably a positive development.

"I think this Budget will be remembered longer than possibly any of Mr Osborne's other Budgets, other than his first one, because this really is a big change to the pensions market," he told the BBC Radio 4 Today programme.

"It will really free up people's choices in pensions and that's probably a good thing.

"There are probably some risks associated - who knows what will happen to the annuities market?

"Some people will be left worse off, let's be clear, because it will become more expensive to buy an annuity because only those who really think they are going to live a long time will be buying an annuity, making them more expensive."