Osborne unveils plans for retirees to have greater control over pension pot

British chancellor of the exchequer alters rules to let pensioners take their retirement savings as lump sum

British chancellor of the exchequer George Osborne stunned the pensions industry by announcing plans to give people far more freedom to choose what they do with their pension pot. Photograph: Bloomberg

British chancellor of the exchequer George Osborne stunned the pensions industry by announcing plans to give people far more freedom to choose what they do with their pension pot. Photograph: Bloomberg

Thu, Mar 20, 2014, 01:00

British chancellor of the exchequer George Osborne yesterday unveiled the biggest pensions revolution for almost a century, in a budget aimed at savers and the grey vote that sent shares in insurance companies into a tailspin.

The Tory minister stunned the pensions industry by announcing plans to give people far more freedom to choose what they do with their pension pot, outlining plans to change rules that in effect forced people to buy an annuity at retirement.

More than £3 billion (€3.6 billion) was wiped off shares in the insurance sector; leading annuities providers including Legal & General, Aviva, Standard Life and Prudential experienced sharp declines. Partnership, a specialist pensions provider, fell more than 50 per cent.

The pensions shake-up was the biggest surprise in a budget that saw the chancellor promise long-term reforms to encourage savings and to address “historic weaknesses” in manufacturing, exports and business investment.


Bingo tax
With a deficit above £100 billion and not forecast to return to surplus until 2019, Mr Osborne’s budget was fiscally neutral and scarce resources were targeted at “hardworking people”, notably through a rise in the income tax threshold and through populist cuts to beer duty and bingo tax.

But Mr Osborne surprised Westminster and the City by targeting another key sector of the electorate, with a wide-ranging package of measures to help savers and those planning their retirement. Although he delivered his speech against a backdrop of falling unemployment and the fastest growth of any large economy, he warned: “We’re putting Britain right but the job is far from done.”

Higher growth forecasts this year and next were tempered with warnings from the Office for Budget Responsibility that the underlying public finances had not improved, household debt was rising back to pre-crisis danger levels, exports were feeble and productivity growth had been “exceptionally weak”.

Mr Osborne’s reforms mean retirees will have the freedom to take savings built up in a defined contribution pension as a cash lump sum, subject to their marginal rate of tax, instead of turning their savings into a guaranteed lifetime income as an annuity.


Future crisis
But there were warnings that Mr Osborne might be sowing the seeds for a future crisis in which some pensioners fritter away their lifetime earnings or lose them in ill-judged investments.

Ed Balls, the shadow chancellor, asked: “Will we have people running out of money and forced to rely on the welfare state?”

Mr Osborne argues pensioners who waste their retirement pot will not have to fall back on the state because improvements to state pensions will keep them above the poverty line.

The changes to the pension market came as part of a big package to help savers. The chancellor said he would increase the simplicity and generosity of individual savings accounts, by merging cash and stocks ISAs (a saving product with favourable tax status) to create a single product and increasing the total limit to £15,000. – (Copyright The Financial Times Limited 2014)