London: During the 1980s, the right to own your own home became a rallying cry for Conservatives. On Wednesday, George Osborne staked a fair chunk of his legacy on the right to own your own pension becoming the equivalent totemic promise in the 21st century — and for largely the same constituency of voters.
Osborne characterised his changes to the pension system — including removing the near compulsion to buy an annuity, the abolition of punitive tax rates on cash withdrawals above 25 per cent of the accumulated fund, and the right to free impartial advice — as “the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921”.
He is quite probably right. There have been other shake-ups, such as the introduction of personal pensions in the late 1980s, Gordon Brown’s infamous “dividend tax raid” of 1997 and the “A-day reforms” of 2006, subsequently dubbed “pension complification”.
But these were largely matters of detail, not substance. The basic structure of pensions remained the same. Workers either saved into a defined benefit scheme and got a pension based on their earnings and length of service and underwritten by their employer.
Or they took their chances with defined contribution, investing in the stock market and, most often, converting their accumulated fund into tax-free cash and an income for life based on Gilt yields.
Osborne’s proposed changes are welcome and overdue, even if they are risky in some respects.
Two factors in particular forced the changes upon him. The first was the inexorable decline — in the private sector, at least — of defined benefit or “final salary” pension schemes.
Figures from the Office for National Statistics show almost 34 per cent of private-sector employees were enrolled in a defined benefit pension scheme in 1997, compared to just 8.5 per cent now.
Some blame this decline almost squarely on the dividend tax raid, but it was also down to rising longevity and falling investment returns.
For many employees, that left defined contribution or “money purchase” schemes as the only game in town, and for many these are unattractive. Returns are at the mercy of stock and bond markets. At retirement, the purchase of an annuity is a tiresome, bewildering and irreversible chore – and for those who had the misfortune to stumble into retirement during an era of financial repression, a poor-value one too.
Even with the incentive of tax relief — at a total net cost (across all pension types, in both public and private sectors) of over GBP30bn each year – ordinary people regarded pensions as complex, confusing and inflexible. That’s hardly the ideal backdrop for an ambitious project to automatically enrol every working adult into an employer-supported pension scheme by 2018.
The other factor was the increasingly strident criticism of pension providers and insurers – including high charges, mediocre performance and dubious practices – by consumer groups and ministers.
Osborne boasts that he is putting savers in charge of their own money. Doing so brings the near-certainty that some will do unwise things with it. An FT poll after the Budget showed that just 4.5 per cent would still buy an annuity, against 42 per cent who would take out their entire fund. Critics are already speculating that pension assets will be poured into buy-to-let property or living the good life, and that increasing numbers will outlive their money. Others point out that contribution rates in auto enrolment are not high enough, and that participation rates may fall.
Such concerns are valid, but they shouldn’t obscure the fact that the current system is not working well for many people. And that is surely what Osborne has calculated as he embarked on this high-stakes move.