The day Osborne compromised the future of the British economy to win an election

Thursday, 20 March 2014 21:56

3 Comments

  In the 1997 budget, Chancellor Gordon Brown made an un-noticed technical change to the tax treatment of pension funds.  It was the ultimate victimless crime, creating barely a ripple and raising £5 Billion per annum of tax revenues from faceless pension funds & city fat cats. 

The only flaw in this cunning plan is that it turned out that it wasn’t the fat cats whose money was being taxed, it was ours.

17 years later most commentators believe that this has been a major factor in the decision made by many employers to close their gilt edged works pension schemes which had delivered great pension outcomes to generations of Brits … and depriving 100,000s of British workers the pension they expected.

UK Chancellor George Osborne gave his 2014 budget on Wednesday.  On reading the write up on the BBC I was struck by its lead on the boost that had been delivered to pensioners and savers. 
 
At the heart of this was a change to the rules on pensions which means that you will no longer be forced to buy an annuity from an insurance company when you take your pension.  This will give you ‘flexibility’ and ‘control’ on how you access the money that you have worked hard to build up during your working life.
 
The option will be available to you to take back your whole pension pot as cash, getting some of it back tax free and the remainder at your normal tax rate to spend as you wish.  If you have a large pension pot, are over 55 and choose to take advantage of this new found flexibility it will allow you to pay for that holiday of a lifetime, the extension you have put off for years or to finally buy that lamborghini to replace the second hand Fiat Brava you have been driving round in. 

All this spending is going to give a significant boost to the economy as we seek to bounce back from this period of austerity.  It will also help the exchequer increase the tax take and cut Government debt. 
 
And best of all, some of the changes are being implemented immediately with the rest coming in April 2015 so there is not long to wait until you can benefit from this new found flexibility.

Just like Gordon Brown in 1997 everyone wins!
 
But…lets take a closer look at what is happening here.
 
The Conservative Government has delivered a policy which will deliver greatest benefits to their own core vote of wealthy 55 to 75 year olds.  By sheer coincidence it will fully implement weeks before the next election. 

Pension monies will be withdrawn and either spent, gifted on to other family members or moved offshore ultimately depriving the exchequer of access when it comes to paying for long term care.  As our Pensions Minister states, it is your choice if you want to buy a Lamborghini.

This will create a nice one off boost to the economy, just in time for the election.

As for the rest of us ‘hardworking’ people, we get a token reduction in what we pay for the things we enjoy most, bingo and beer…….  As Marie Antoinette once (almost) said, Let them drink beer…What happened next?
 
As the Institute for Fiscal Studies has noted, the Conservative Government has increased the tax take in the short term with an offsetting reduction in the longer term allowing it to demonstrate the effectiveness of its austerity plans (again, weeks before the next election) and leave the Government of the 2020s to pick up the pieces when the tax rate is likely to be lower than it would have been.

And what will happen when more and more people decide that the rational thing to do is to spend their pensions now rather than act prudently, take a lifetime income and contribute towards the cost of their long term care?

Given the importance to the future solvency of the UK of having properly funded pensions/long term care as our population ages what is the plan for UK PLC when the tax take is lower and individuals have spent/hidden the money they were supposed to contribute towards paying for their long term care?
 
Wasn’t the point of getting us all to join our works pensions to create a new savings culture, not finance a one off retirement spending binge on high performance sports cars?
 
And what about business?
 
The industry had no warning of these changes, no ability to influence, no time to ready themselves.  The policy was delivered in the same manner as a Vladimir Putin directive.  They have been given the near impossible task of trying to implement the initial changes in just nine days and dealing with floods of queries from customers perfectly timed to coincide with their busiest period of the year – around the end of the tax year.  Genius.
 
The share price of virtually every insurer in the market fell on Wednesday.  In some cases by over 50%, wiping Billions of pounds off the sector’s stock market value and giving a clear view on what investors think.

The impact on our own Standard Life was relatively minor, its shareholders only suffered a loss of £¼ Billion during the day.  Any of you still have your shares from their demutualisation?

I wonder if they had this scenario on recently published their risk plan?

Isn’t it a wonderful thing that the Union delivers this environment of certainty allowing our businesses to thrive without any risk of unexpected, ill considered, hastily implemented change pandering to the Government’s own electoral base which undermine the long term financial viability of the country.

Tell me again about the unparalleled uncertainty which independence is going to bring to our businesses?

 
Submitted by a Newsnet Scotland reader
Name withheld at writer’s request