The British government's key decision in Wednesday's budget – to make major changes to private pension rules – serves an economic and a political need. For the Conservative Party in particular, the introduction of the most radical reform in pensions in almost a century should have a double effect. Retirees will now be free to choose how to spend their accumulated pension savings, which should provide a boost to the UK economy. And the Tory party hopes that this overdue reform, allied to greater incentives offered to savers, will enhance its appeal to grey voters, and so help it regain support lost to Ukip, the party's far-right electoral challenger.
Chancellor of the exchequer, George Osborne is, however, in many respects following rather than leading developments in international pension reform. Ireland in 1999, through Charlie McCreevy, made a similar though less far-reaching pension adjustment. And since then retirees, assuming they have the required minimum level of income, are no longer obliged to buy an annuity with their pension savings. Instead, they may invest in an Approved Retirement Fund (ARF), and draw down income later as needed. Annuities, which provide a pension income in retirement, have become more expensive and less affordable. As interest rates largely determine the cost of annuities, record low interest rates in recent years have made annuities more expensive to buy, and so made it harder for retirees to secure an adequate income in retirement.
Mr Osborne, in now allowing retirees to use their pension savings as they please, and without restriction, must however fear the law of unintended consequences. For if too many retirees chose to spend their pension pot, and waste the proceeds, they may, as Labour's shadow chancellor, Ed Balls, has suggested, have to rely on the welfare state. The pension reform represents an act of faith in the good investment sense of the British pensioner. But whether Mr Osborne's belief is fully justified has yet to be established.