Chancellor of the Exchequer George Osborne made savers the main beneficiaries of his annual budget yesterday as he announced the biggest shakeup of the British pensions industry for almost a century.
Osborne outlined a package of measures that scrapped most of the constraints on how new retirees can manage their pensions, sending the shares of life insurance companies tumbling. He also introduced a new bond giving pensioners higher interest rates and made tax-free savings plans more generous.
With 14 months to go to the general election, Osborne faced pressure from some Conservative lawmakers to do more to help core voters, some of whom have been lured away to the anti-European U.K. Independence Party. Pensioners and savers have seen returns on their money shrink since the financial crisis drove interest rates to a record low.
“It’s a definite pitch for the gray vote, with a generous package for pensioners and savers, and may alleviate some Tory criticisms,” Wyn Grant, professor of politics at the University of Warwick, said in an interview. “At the end of the day, they are the ones susceptible to go to UKIP, and the ones who actually turn up to vote.”
The Tories are seeking to prevent UKIP from taking first place in May’s voting for the European Parliament elections, the last national poll before the 2015 general election. While stressing the need to keep cutting the budget deficit to underpin the recovery, he found money to help the low-paid by reducing a tax on bingo and increasing the amount people can earn before they pay income tax.
In the biggest overhaul of the industry since 1921, the chancellor abandoned tax restrictions that force most of the 13 million savers in so-called defined contribution pension plans to buy annuities with their funds on retirement. Savers wanting unrestricted access their pension pots will be taxed at their marginal rate -- 20 percent for most -- instead of 55 percent under Osborne’s plans.
“We have a more generous basic state pension, less means-testing, and that allows us to get rid of very old-fashioned government requirements requiring people to take out annuities,” Osborne told BBC Radio today. “These changes to pensions and savings all contribute to creating a different culture.”
The move wiped 3.6 billion pounds ($6 billion) off the market value of insurance firms, for which retirement products have been a key source of profits growth. Legal & General Group Plc lost 8.4 percent and Aviva Plc dropped 5.2 percent. Both companies recovered some ground in London trading today.
Investors also sold longer-dated debt securities, which pension funds tend to hold to match their annuity liabilities. The 30-year gilt yield rose to 3.56 percent today, the highest for a month.
In its budget analysis today, the Institute for Fiscal Studies said the pensions overhaul could make annuities more expensive. “There is a market failure here. There will be losers from this policy,” IFS Director Paul Johnson told a briefing in London.
Another risk, he said, is that people underestimate their life expectancy and spend too much of their savings early in retirement.
“Without wanting to be be seen as patronizing, it is important to point out that increased choice could lead to more mistakes,” he said.
An improved economic outlook allowed Osborne to argue that four years of austerity is working as he defended his policies against Labour opposition claims that the government has ignored the rising cost of living and left families worse off.
The Office for Budget Responsibility, Britain’s fiscal watchdog, raised its growth forecast for this year to 2.7 percent from the 2.4 percent projected in December.
It cut its budget-deficit forecast for fiscal 2013-14 by 3.4 billion pounds to 107.8 billion pounds, or 6.6 percent of gross domestic product, and said the shortfall in the next five years will be 20 billion pounds lower than previously estimated. Government debt will peak at 78.7 percent of GDP in 2015-16 instead of 80 percent, the OBR said.
The Debt Management Office surprised investors by announcing it will sell 128.4 billion pounds of gilts in the next fiscal year, less than the median estimate of 151 billion pounds in a Bloomberg survey of primary dealers. The drop from 153.4 billion pounds in the current fiscal year was partly due to an assumption that the new pensioner bond will provide an alternative funding source for the Treasury.
The benchmark 10-year gilt yield rose 8 basis points to 2.78 percent today after Federal Reserve Chair Janet Yellen signaled U.S. interest rates may rise by the middle of next year.
Exporters will also benefit from the budget, with the government doubling the amount of finance lending available to 3 billion pounds and cutting the interest rate charged on that by a third. Osborne also increased the annual investment allowance for plant and machinery.
“We’re building a more resilient economy,” Osborne said. “This is a budget for the makers, the doers, and the savers.”
While Labour is leading in the polls, it remains less trusted than the Conservatives on the economy, according to regular YouGov Plc surveys.
Osborne was keen to underline that yesterday as he said there had been no improvement in the underlying state of the public finances and years of austerity lie ahead. He announced welfare spending apart from pensions will be capped at 119 billion pounds in 2015-16 and then rise in line with inflation, challenging Labour to match the commitment.
“From an economic point of view, the budget has done the right thing, as you don’t need to stoke the fire when it’s growing very strongly,” said Steven Bell, a London-based fund manager at F&C Asset Management Plc in London, which oversees the equivalent of $150 billion. “Politically, after four years of austerity, he could have afforded a few more giveaways, as people’s real income remains an issue.”
Osborne said that measures to help the lowest paid would benefit all people earning 100,000 pounds or less. The threshold for paying basic-rate income tax at 20 percent will rise to 10,500 pounds in 2015 from 10,000 pounds.
Osborne canceled a fuel-duty increase scheduled for September and cut in half the tax on bingo clubs, which are mostly frequented by working-class voters, to 10 percent.
A picture posted on Twitter by Conservative Party Chairman Grant Shapps promoting tax cuts on bingo and beer “to help hard-working people do more of the things they enjoy” was criticised as “patronizing” by the Tories’ Liberal Democrat coalition partners.
“I thought it was a spoof at first,” Chief Secretary to the Treasury Danny Alexander told BBC television yesterday. “I think it’s rather patronizing.”
The overall budget was fiscally neutral, with giveaways financed by a further clampdown on tax avoidance. Tax-raising measures targeted the rich as Osborne imposed an annual charge on high-value unleased properties owned by companies and increased the amount of air-passenger duty levied on private jets to six times that levied on economy-class flights.
“There is some scope for some positive surprises on the deficit,” said James Knightley, an economist at ING Bank NV in London. “This could potentially give the chancellor some room to offer more tantalizing incentives in the autumn budget statement”