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Pension pots 'can be used to buy Lamborghinis' says minister Pension pots 'can be used to buy Lamborghinis', says minister
(about 4 hours later)
Affluent people approaching retirement should be free to blow their pension pot on a Lamborghini even if they end up relying on the state for support, the pensions minister says. Affluent people approaching retirement should be free to blow their pension pot on a Lamborghini even if they end up relying on the state for support, a minister said on Thursday as the government defended its far-reaching loosening of the rules on annuities in the budget.
Steve Webb said on Thursday, as he defended reforms in the budget, that the government would be "less bothered" how people spend their pension pot. The remarks came after the Institute for Fiscal Studies warned that there would be losers from the loosening of the rules on annuities, announced by George Osborne in the budget. As the Institute for Fiscal Studies warned that there would be losers from the move, announced by George Osborne on Wednesday, the Lib Dem pensions minister, Steve Webb, said the government was "less bothered" about how people spent their pension pot.
Webb told the BBC: "One of the reasons we can be more relaxed about how people use their own money – and as a Liberal Democrat I want to give people those sorts of freedoms – is that with the state pension coming in, the state pension takes people above those sorts of means tests. "One of the reasons we can be more relaxed about how people use their own money – and as a Liberal Democrat I want to give people those sorts of freedoms – is that with the state pension coming in, the state pension takes people above those sorts of means tests.
"So actually, if people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice.""So actually, if people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice."
Webb raised the prospect of people in their 50s and 60s splashing out on the Italian sports cars, which can cost over £300,000, amid an intense debate over Osborne's decision to introduce the most far-reaching reform of the taxation of pensions since 1921.Webb raised the prospect of people in their 50s and 60s splashing out on the Italian sports cars, which can cost over £300,000, amid an intense debate over Osborne's decision to introduce the most far-reaching reform of the taxation of pensions since 1921.
People on money-purchase pension schemes will no longer be forced to take an annuity – the income guaranteed by pension providers in exchange for receiving all or part of the funds in their pension pot. A "punitive" 55% tax rate imposed on anyone who takes out more than a quarter of the savings in their pension pot will also be cut to the marginal rate of tax.People on money-purchase pension schemes will no longer be forced to take an annuity – the income guaranteed by pension providers in exchange for receiving all or part of the funds in their pension pot. A "punitive" 55% tax rate imposed on anyone who takes out more than a quarter of the savings in their pension pot will also be cut to the marginal rate of tax.
The chancellor believes that the reforms will end the "patronising" view that people cannot be trusted to invest the funds from their pension pot. Labour, which is being careful to avoid Tory accusations that it wants to limit people's choices as they approach retirement, is restricting itself to raising questions about the policy. The chancellor believes that the reforms will end what he called the patronising view that people cannot be trusted to invest the funds from their pension pot. Osborne said: "People who saved their whole lives, saved for a pension, these are responsible people … it is their money. They can do what they want."
But Gregg McClymont, the shadow pensions minister, retweeted a link to a piece on the Public Finance website about "Osborne's pensions catastrophe" by James Lloyd. Lloyd wrote: "In one swoop, budget 2014 destroyed UK pension policy. The chancellor's announcement that individuals will no longer have to buy annuities is possibly the most catastrophically bad policy decision made by this government. It will almost certainly have to be reversed, if it can be." Labour, careful to avoid Tory accusations that it wants to limit people's choices as they approach retirement, is restricting itself to raising questions about the policy. Ed Balls, the shadow chancellor, said: "I just don't want to find people in their 50s today with pension pots finding out in 10 years' time that what the chancellor called liberalising and radical ended up being reckless and irresponsible. That is why we need to scrutinise it very carefully."
Paul Johnson, the director of the IFS, warned that the changes could make annuities even more expensive because people who are expected to live longer would be more likely to purchase them. He said: "There are some genuine uncertainties about the effect of the policy. Most importantly it will likely make annuities even more expensive for those who do want to buy them. The market will become much thinner and there will be greater levels of adverse selection – only those expecting to live a long time will want to buy an annuity thereby driving up the price. There is a market failure here. There will be losers from this policy. But Gregg McClymont, the shadow pensions minister, retweeted a link to a piece on the Public Finance website about "Osborne's pensions catastrophe" by James Lloyd. Lloyd wrote: "In one swoop, budget 2014 destroyed UK pension policy. The chancellor's announcement that individuals will no longer have to buy annuities is possibly the most catastrophically bad policy decision made by this government. It will almost certainly have to be reversed, if it can be."Paul Johnson, the director of the IFS, said the changes could make annuities even more expensive because people who are expected to live longer would be more likely to buy them.
While saying that there were advantages to the pension changes, including the likelihood that people would save more, he added: "There are some genuine uncertainties about the effect of the policy. Most importantly it will likely make annuities even more expensive for those who do want to buy them. The market will become much thinner and there will be greater levels of adverse selection – only those expecting to live a long time will want to buy an annuity, thereby driving up the price. There is a market failure here. There will be losers from this policy.
"Without wanting to be seen as patronising, it is important to point out that increased choice could lead to more mistakes. People at 60 or 65 are known to underestimate their own life expectancy, and especially the likelihood of living to extreme old age. They may overspend early in retirement.""Without wanting to be seen as patronising, it is important to point out that increased choice could lead to more mistakes. People at 60 or 65 are known to underestimate their own life expectancy, and especially the likelihood of living to extreme old age. They may overspend early in retirement."
The warning about the impact on annuities challenged the treasury's view that reforms would improve annuity rates. A Treasury source said after the budget: "It should lead to a more competitive market because at the moment people are forced to buy an annuity. Now companies selling annuities will have to compete for their business against other options. At the same time the Financial Conduct Authority is conducting a market review of the annuities industry so we will see what they have to say." The warning about the impact on annuities challenged the Treasury's view that reforms would improve annuity rates. A Treasury source said after the budget: "It should lead to a more competitive market because at the moment people are forced to buy an annuity. Now companies selling annuities will have to compete for their business against other options. At the same time the Financial Conduct Authority is conducting a market review of the annuities industry so we will see what they have to say."
Tom Watson, the campaigning MP, was one of the few prominent Labour voices to warn of the dangers of the change. In a blog, Watson said that the annuities market evolved as "an early example of the state, the individual and the private sector co-operating to protect one another from the everyday risks that we all face". In its post-budget analysis, the IFS said Osborne was getting into "bad habits" by glossing over how he intended to pay for the tax cuts announced on Wednesday. "A set of definite and permanent tax cuts look to have been matched by more unspecified spending cuts, some changes in the timing of tax receipts, and our old friend tax avoidance measures," said Johnson.
Watson added: "What the chancellor announced yesterday fundamentally threatens that deal. It says to the individual – pay into this pot, take the tax breaks and the special protections, then do whatever you want with it later on. It's a one-sided charter for tax avoidance that misunderstands why our carefully constructed mixture of the public and the private works for pensioners and works for the UK as a whole." The IFS director warned that further "very, very substantial" spending cuts were planned for after the 2015 election but Osborne had yet to specify how these would be made. Johnson said the chancellor had made some bold changes but the budget "leaves us with as little sense as we had before of quite how the very large public spending cuts still in the pipeline will actually be delivered".
Current Treasury plans pencil in deficit reduction of just over £20bn in the year after the election, with almost all planned to come from spending. Johnson said he suspected the difficulty in making the cuts would lead to taxes going up.
"It [the planned spending reduction] is doable if the government has got the political will, but it will be difficult. After elections tends to be the time for tax-raising budgets. I don't know whether that will be the case but I wouldn't bet against it."
The Treasury rejected IFS criticism that the budget delivered a short-term gain at the expense of a long-term weakening of the public finances.
"Thanks to the government's long-term economic plan the deficit is set to halve by the end of this year," a spokesman said. "But the chancellor has been clear that more difficult decisions lie ahead, and as he said : 'In addition to the cuts this year and next, there will be cuts in the next parliament too.' We have set out clearly the extent of the need for further spending cuts.
"At the budget, we took further steps to control spending through the welfare cap, departmental spending reductions, public sector pay limits, and reforms to public service pensions. We have been fully transparent about the long-term impacts of these far-reaching pension reforms. By taking difficult decisions on the state pension age we have placed generous pension provision on a sustainable basis."
The IFS said if the next government continued to ringfence the NHS, schools and overseas aid from cuts, other Whitehall departments would see their budgets shrink by 36% between 2010-11 and 2018-19. Its analysis also showed that 2.4 million people had been taken out of paying income tax by the increases to the personal allowance since 2010 but additional 2 million more people were paying higher-rate tax.