The Lamborghini Reforms. It’s got a ring about it, hasn’t it? The Liberal Democrat pensions minister Steve Webb has said he is relaxed about the prospect of people cashing in their pension pot and buying an expensive fast car. What is telling is the flippancy. We’re not talking about the lottery, we’re talking about people’s income in retirement.
Let’s remember the context. Personal, direct contribution, schemes were promoted as an answer for an increasingly mobile workforce. They provided as good a pension as a final salary scheme provided there were low charges and a decent employer contribution.
There’s the rub. Employers. They are happy to contribute to a private pension because it is buying their workers an income in retirement. Now it’s a sports car fund, what interest or incentive do employers have to make any contribution at all? Further, why should this form of savings get preferential tax treatment compared to any other form?
The coalition has cynically scored a boost in tax revenues as a consequence of its changes. It is expecting £2bn a year in extra tax as people use this new freedom to raid their pension pots. George Osborne knows what he is doing – but he doesn’t care.
The wrapper that the coalition is putting on this is ‘freedom to spend your own money.’ No one can object to that, and no one does. Spend your pension how you want. But it should be a pension – an income for retirement. We compel workers to save for a pension because, given the choice, many – particularly young workers – wouldn’t. We give tax breaks to make it worth it. Then we compel you to buy an annuity. That’s the deal. And it’s the deal because we want to see the independence that a decent income of your own gives you in retirement.
The philosophical objections to Osborne’s scheme are individual and collective. On the one hand we are very bad at calculating our own life expectancy – most people get it between five and 10 years too low. That’s because at 65 life expectancy rises by six and a half hours every single day – two and a half years a decade. On the other pensions are a collective provision – we pool the risk when we buy an annuity and it pays a pension whether we live to 85 or 105.
It needn’t be this way. Osborne has form for being too clever by half, or, to adapt the line from ‘King of Comedy’, he’s often king for a day, but schmuck for a lifetime. This change will unravel as its impacts are mapped. We still don’t know how it will hit public sector workers – but rest assured it will.
Labour – with the union movement – needs to save our pensions.
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The sleeping giant is finally waking. Scottish Labour, the party that made modern Scotland – and from Tony Blair and Gordon Brown to John Reid and Jim Murphy has also made modern Labour – has entered the debate about the future of Scotland. The future, that is, after the people reject independence.
The report of the Devolution Commission has been published in time for this weekend’s Scottish Labour conference. For once, the devil is not in the detail. The most important point is there on the front cover – ‘Powers for a Purpose’ is the title. This has been the missing element of the constitutional debate – it has been about process not outcome. More powers are demanded but with no explanation of why or what for. Until now.
Under Johann Lamont’s leadership the party in Scotland has gone back to basics. We are a social democratic party which wants to see equality. As a result, we are clear about the powers the parliament needs and the ones it doesn’t. So, on welfare we will protect the UK safety net and won’t devolve national insurance, the pension or in-work and out-of-work benefits. Scotland has an ageing population and a smaller workforce as a proportion of pensioners than England – so we welcome the redistribution across the UK that supports Scotland’s pensioners.
There is also a welcome strand of localism. This both recognises the importance of cities, and highlights – once again – that the emerging divide within the Labour party is now between Fabian central planners and localists.
It looks like we’ll all be dusting off Voltaire’s famous quote – ‘We look to Scotland for all our ideas of civilisation’.
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John McTernan is former political secretary at 10 Downing Street and was director of communications for former prime minister of Australia Julia Gillard. He writes The Last Word column on Progress and tweets @johnmcternan
You’re entirely correct of course; I AM too stupid to spend my own money wisely. Because I am a thicko pleb. UPTHEWORKERS!
There is a win-win alternative to this lousy idea: instead of abolishing the requirement to buy an annuity because the annuity market doesn’t work very well, why not offer a fall-back option for people of a government-backed annuity? Require pension providers to inform their clients of the government option: a statement along the lines of “stick with us and you can have £1,000 a month or transfer to the Government scheme and you can receive £1,200 a month” would put an onus on providers to sharpen their pencils or lose business. Of course other options may make sense for some people (paying off debt will always make sense). But the starting point should be for anyone wanting to explore other options to take independent financial advice with very clear recommendations recorded and retaining the tax benefits should depend on this advice being followed – and that the solution provides a long-term income stream.
Cost of a Lamborghini Gallardo £150,000. Average size of UK pension pot £30,000…….
Sorry to introduce facts to the debate but it is really time Labour grew up and considered its attitude to savings and pensions. Annuities have provided a poor choice for pensioners for years. Osborne has at least provided a choice and put some pressure on lazy financial institutions. The blunt truth is that most UK families fail to save – savings ratio down on 5%. The Pensioner Bond with a guaranteed return of 4% is a form of government backed annuity. What are our policies to encourage more people to save especially those under 40?
Another frightening prospect resulting from this idea was mooted today on BBC News – that house prices will rocket even further as pensioners sink their extra money into property.
Good blog John.
But note two things:
FIRST: Osborne is tacitly admitting that the annuity market has failed. Yet another sector of the finance industry is undergoing market failure. Fact is, there is market failure all around: finance, housing, manufacture (for decades), agriculture (for decades), higher education (student loans cost government more than grants did)….When will the penny drop? The emperor has no clothes.
SECOND: When there is market failure, even the most Hayekian of neo-classical economists accepts that a new business model is required. In the case of annuities, such a model needs to encompass the finance industry as a whole.