by Samuel Dale
Buried deep in this year’s dull Budget was a secret £6.5bn tax raid on pensioners and savers under the guise of radical reforms.
George Osborne’s most significant policy announcement was the proposal to allow pensioners already drawing an annuity to sell their policy in exchange for a lump sum.
It is the second stage in major pensions reform announced in last year’s Budget to allow all over-55s to access their pension pots.
The first stage of pension freedoms is relatively simple. The pension system saw savers build up a retirement pot of cash with generous tax relief on contributions. In exchange they had to buy a secure income or annuity (or face a punitive 55% tax if they withdrew their cash from the pension wrapper).
Annuities work as a reverse insurance product so you pay over a big chuck of cash to the insurer and in return they pay you money every month until you die. Insurers pool the risk so those who die earlier fund the payments for those who live longer than expected lives.
As people live longer insurers are paying a lower amount each month over a longer period, making pensioners buying them poorer. Successive Governments have taken steps to ease the requirement to buy an annuity by allowing wealthier investors to drawdown their own money.
But Osborne’s announcement last year, coming into force on 6 April, is the big bang. It means anyone can withdraw their pension pot at marginal income tax rates (although everyone receives an initial tax-free lump sum of 25%).
The Treasury estimates the behavioural changes will see individuals wanting the money today despite the tax penalties. It will lead to many savers paying income tax on withdrawals they have never paid before.
So how much does it cost?
The 2015 Budget documents show first stage of freedoms will raise £310m more tax in 2015/16 then £585m in 2016/17, £890m in 2017/18, £1.2bn in 2018/19 and £785m in 2019/20.
It is worth pointing out that the OBR puts these estimates as highly uncertain based on the unknown behavioural impact of the reforms. But, caveats aside, this measure raises almost £3.8bn over the parliament and it will go on raising money every year until 2030.
The second stage of the revolution is the creation of a second-hand annuity market.
The idea, pushed by Lib Dem pensions minister Steve Webb, would allow those who have already bought a lifetime annuity the chance to access freedoms as well.
The Treasury is consulting with the aim of launching in April 2016 to allow people already receiving income from an annuity to sell that income to a third party subject to agreement from their annuity provider.
The proceeds of the sale could then be taken directly or drawn down over a number of years, and would be taxed at their marginal rate, in the same way as those taking their pension after April 2015.
Sounds straightforward but it is a fiendishly complicated idea fraught with difficulties, riddled with contradictions, complications and on a very tight timetable.
Labour are cautiously supportive but Ed Miliband warned about getting the regulations right to stop “rip-off” pension scams preying on the old.
Again, the change would create behavioural shifts as more people want the cash now even if there is a tax hit.
So how much does it cost?
It would launch next year and raise £535m in extra tax for 2016/17 followed by £540m in 2017/18 before costing the public purse £130m in 2018/19 and £120m in 2019/20.
From April 2015 to 2020 the combined impact of both stages of pension reforms is estimated to raise £4.6bn in extra tax. That is money coming directly from the saving pots of pensioners over the course of the next parliament and we haven’t heard a peep from Labour.
Then there is the latest Budget cut to lifetime allowance for tax relief on pension contributions from £1.25m to £1m. This collects another £1.9bn in tax over the parliament.
On the flip side, pensioners could benefit from new measures to make ISA withdrawals more flexible and a new £1,000 tax-free allowance on the interest payments of cash savings for basic rate taxpayers.
They will also benefit from very generous pensioner bonds paying market-busting rates of 2.8% interest over one year and 4% over three years, exclusively for the over-65s.
But the key pension reforms on extra flexibility and a new annuity market amounts to a well-disguised £4.6bn tax raid on pensioners in the next five years. If you include the new cuts to pension tax relief then this week’s Budget revealed £6.5bn in extra taxes raised from pension savers if the Tories are elected.
Osborne has done everything to attract pensioners back to the Tories and polling suggests his flexibility reforms are popular. Only he could dress up a £6.5bn tax rise as positive Budget for pensioners and Labour is letting him do it.
Sam Dale is a financial and political journalist
Tags: Annuities, budget 2015, George Osborne, income tax, pension reform, pensions, Samuel Dale, taxes
The problem Sam Dale, is that there is no tax raid on the pensioners at all. The pensioner makes there own choice, on what is best for them, with what is ultimately their money to start with anyway and which they received tax relief on as they amassed it they aren’t being taxed at all, they are paying back the tax relief they had at the start because they wish to have the money back – which is, no matter which way you look at it, frighteningly fair.
You may as well try and claim that because they will spend it and thus pay VAT, that it’s a tax raid that way as well. There has only been one out and out large scale pension fund raider in my lifetime and that was a certain Chancellor. Can anybody guess who? And what party?
It’s not even that difficult to understand – in fact the whole budget was one of the easiest to understand during my lifetime.
PS – I intend to cash in one of my annuities and stop the pension I get from it. It makes more sense to.
Let’s see: If pensioners withdraw no money, tehy pay no tax.
Under current legislation, a person using “drawdown” to withdraw money from a pension scheme pays tax at their marginal rate on teh money withdrawn.
And nothing will change – exactly as Sam Dale describes above.
I am sure Mr Dale would be better employed by the Daily Mail who love to generate horror stories based on noting: this article would suit them
@Madasafish
@Tafia
The Treasury is estimating it will raise £4.6bn over the course of the parliament from its pension reforms. Yes, it’s an uncertain number and people can choose to pay more or less tax so it doesn’t feel like a tax rise to them (although they may be hit with unexpected tax bill). It could also include some tax being brought forward.
But the Treasury is expecting £4.6bn extra tax over the parliament. That’s indisputable. That is tax raised from same savings pots as previously expected. There are many factors at play but £4.6bn is expected to flow to the Treasury. That is worthy of note and I believe the extra tax take over 5 years was a factor in the policy decision.
How will they be hit with an unexpected tax bill? It can’t be unexpected because the process of cancelling the annuity and ‘selling’ it will contain details of the tax implications which they will have to consent to first. So it can’t be unexpected can it because it has to be consented to.
And the revenue ‘raised’ isn’t really raised at all, the correct terminology would be ‘recovered’ – because it’s only the tax relief they’d had for not doing what they are precisely now doing.. They had a tax break to encourage them to save into something to buy an annuity they couldn’t cash in, now they can cash it in if they want to on the understanding that that tax will now be liable.
Christ on a rubber skateboard, it’s not even complicated – that’s the beauty of it.
I shall be asking for a quote on the lesser of my two annuities as soon as it’s law – if the offer is good enough I’ll sell it on. And as for paying the tax back? That’s a perfectly fair deal, it’s also morally correct.
Off-topic I know, but we were ‘discussing’ on here several weeks ago about the asian muslim community rigging the postal votes etc etc and the misuse of the braderie system by their community n local parties.
Myself and several others on here who had seen it going on fiorst hand were basically brushed of as racists and liars.
From today’s Guardian regarding membership suspensions in Halifax.
I rest my case.
http://www.theguardian.com/politics/2015/mar/20/labour-disqualifies-130-halifax-party-members-linda-riordan
@Tafia
Your link doesn’t say anything about postal vote fraud.
Where is your case?
Sam – people with only a short window for building a pension pot were thoroughly stuffed by Gordon Brown and then by the bankers ball-up. If you have a pension pot of 5000 you’ll be lucky to see 150 a year…a mighty three quid a week. Of course you’d be better off with the cash; what will that £3 buy in ten or twenty years time? The real criticism of Osborne – and Labour should be making it – is that the process will require the permission of the company who sold the annuity and have already done very nicely out of it.
BenM – you are either severely mentally disabled or just stupid. 153 memberships processed on the same credit card. 130 memberships with votoing. As for organised postal vote fraud?
http://www.independent.co.uk/voices/commentators/mary-ann-sieghart/mary-ann-sieghart-how-dodgy-postal-votes-may-decide-our-next-government-7646617.html
http://www.peterboroughtoday.co.uk/news/latest-news/officials-guilty-of-vote-rigging-1-94659
http://www.birminghammail.co.uk/news/birmingham-vote-fraud-still-happening-7229359
http://archbishop-cranmer.blogspot.co.uk/2010/09/baroness-warsi-labour-steeped-in-asian.html
http://www.theguardian.com/politics/2014/may/23/police-open-inquiries-allegations-electoral-fraud-uk
http://news.bbc.co.uk/1/hi/england/west_midlands/4406575.stm
And there are literally hundreds and hundreds more examples. Try using the magical thing known as Google instead of showing yourself as a somewhat disappointingly flaccid and non-effective male appendage.
But fear not. In the last couple of years there have been convictions for postal vote fraud against asian muslim local party officials from Labour, Lib Dem & Tory. Fair, if nothing else.
153 is typo for 130.
@Tafia
A couple of convictions, more though are unproven allegations.
The postal vote system isn’t perfect. But neither is it undermining democracy and the hysterical anti postal vote brigade should get off their high horse.
BenM. we’ve been through all this before and like I said, if you google it you will get tens of thousands of hits. Even the Labour Party admit it so are you saying they are hysterical?
I personally have witnessed it in Oldham – in the Glodwick ward to be precise. Other people on here have also witnessed it and like me know it was done with the full knowledge of the CLP and was widescale – the clan leaders even promising in advance how many vote forms they would deliver from their particular braderie.
You should not be allowed to vote at a polling station unless you provide photo-ID that is checked at the time of the voting and people should pay a nominal fine if they do not report to their polling station on voting day – they don’t have to vote, but they must attend. You should not be able to postal vote unless there are very real reasons for you to need a postal vote. The polls are open for 15 hours and very few people live more than a mile from their polling station.
As it currently stands it’s a farce and as one High Court judge has already remarked, more akin to a banana republic.