Reforms 'will raise annuities cost'

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Chancellor of the Exchequer George Osborne watches a trainee lay a block  during a visit to a Barratt Homes building site in Nuneaton, the day after he said in his annual budget that the government would extend the equity loan portion of the Help to Buy scheme for four years longer than planned to 2020, a move he said would deliver 120,000 new homes.

Pensioners could be "priced out" of buying an annuity as a result of the radical reforms to retirement savings announced in the Budget, a respected economic think tank has warned.

George Osborne made incentives for savers and pensioners the centrepiece of his Budget statement.

But the Institute for Fiscal Studies (IFS) said there would be losers from the package, with those wanting the long-term security of an annuity among those hit.

The IFS also warned that the Chancellor risked weakening the UK's public finances in the long term by using temporary rises in revenue to pay for permanent tax giveaways and called for greater clarity about the substantial spending cuts needed in the next parliament.

The number of higher rate taxpayers will increase from 4.7 million this year to 5.3 million in 2015/16 - including around 350,000 in the top 45p bracket, the IFS predicted.

Chancellor George Osborne rejected calls from Tory MPs - and two Conservative ex-chancellors - to stop ever more people being caught in the 40p higher income tax band.

The IFS estimated that 1.4 million more people were caught in the higher rate than under the plans inherited by the coalition Government.

IFS director Paul Johnson said the Budget would be remembered for the pensions and savings changes.

"The liberalisation of pension rules is expected to lead to more tax revenue over the next few years.
But that depends on rather uncertain behavioural assumptions and in the long run the Treasury expects the measure to reduce annual revenues in future years.

"There are a few of those sorts of things which increase revenue in the short run, reduce it in future years and among those were also some of the changes to tax avoidance rules which bring in quite a lot of money up front but less money per year later on."

The Budget package will see people given free financial advice about their pension pots, and allowed to draw as much of their defined contribution fund as they want.

Instead of being hit with punitive 55% tax on sums they extract, they will instead pay normal rates.
But those who still want to purchase an annuity to fund their retirement will suffer, the IFS warned.

Mr Johnson said: "There are clearly advantages to this liberalisation. It will allow people freedom to manage and make choices over their own affairs and it will likely increase the incentive to save in a pension."

But he added: "There are some uncertainties about the effect of the policy. Most importantly it will make annuities more expensive than they otherwise would have been.

"The market will become thinner and there will be greater levels of adverse selection.

"Only those expecting to live a long time will buy an annuity if they don't have to, there is a market failure in annuities which can at least justify some degree of compulsion and there will be losers from the policy.

"That's not to say the policy is a bad one but it is important to be clear about those effects."

He added that the Budget did not give any further information about how the "very big spending cuts that are still in the pipeline" will be delivered.

Cuts of 35.6% would be required in unprotected departments if the NHS, schools and aid budgets remained ringfenced to 2018/19.

The IFS' Gemma Tetlow questioned the way Mr Osborne had funded his pension reforms and tax giveaways worth £4.9 billion a year by 2018/19.

"What was announced was a package of fairly permanent tax giveaways aid for by rather more unspecified spending cuts and a succession of measures which are temporary tax increases rather than permanent tax increases," she said.

Although they were "relatively small" amounts, "the effect of the measures yesterday was to somewhat weaken the long-run finances".

The think tank also criticised the decision to raise the income tax personal allowance to £10,500 - arguing that a cut in National Insurance Contributions (NICs) would benefit more of those on lower incomes than the flagship Liberal Democrat measure.

The IFS' David Phillips said: "This tax cut is becoming even less well targeted at those on low incomes because you need to earn £10,000 to gain at all from this latest increase.

"If the Government did want to increase support for those on low incomes and low earnings increasing the NICs threshold would be a better targeted way of doing it."

The Budget for "the makers, the doers, and the savers" included a new state-backed Pensioner Bond that will help people who have suffered low returns since interest rates were slashed.

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 Osborne said his Budget reforms would help "responsible" pensioners who had been getting a bad deal from annuities and insisted people should be "trusted" to make the right financial decisions.

The Chancellor 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."

The Chancellor 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.

Budget 2014: Winners and Losers

Budget 2014: Winners and Losers