On Wednesday, George Osborne stood up in the House of Commons and gave us a status update on Project Protect Pensioners (public codename: Budget 2014). You can view the full details on gov.uk, and I have extracted and commented on some of the more prominent measures below.
Individual Saving Accounts
Individual Savings Accounts (ISAs) are undergoing several changes, including:
- Equal limits for cash and shares - currently only half the total annual allowance can be in cash.
- Annual limit raised to £15,000 (from approximately £11,500).
- Peer-to-peer loans will be eligible for inclusion in ISAs.
- Maturity rates for bonds held in ISAs are to be abolished - previously bonds required a minimum of 5 years until maturity to qualify.1
These changes make ISAs an extremely attractive option for both short and long term saving and investment, all exempt from income tax, national insurance and capital gains tax.2 In fact, I would argue that with these changes, ISAs are now a more attractive option than pensions for retirement saving - although the two are not mutually exclusive.
The only downside to these changes is that, like the personal allowance, they will not help the poorest in society. In fact, increasing the annual limit to £15,000 only benefits people who can afford to deposit over £1000 a month into a savings account, which probably excludes anyone with a mortgage or children.[note ISA limits apply per-person, so a couple who can save £1000 a month between them will not benefit from the increase.] However, I am generally in favour of methods which aim to encourage people to save, and even those who cannot afford to put in the maximum amount may be convinced to save a little bit more simply because the allowance is higher.
If you have a defined contribution pension - i.e. there is no guarantee as to the level of income you’ll receive on retirement - you will be able to access these funds as you wish on the point of retirement, instead of being compelled to buy an annuity. Share prices of annuity providers such as Aviva plummeted when the announcement was made, although ironically most pension funds will have significant sums invested in such companies. The government is apparently going to guarantee free and impartial advice on retirement by placing a new duty on pension providers to offer this, although expecting this to be implemented by April 2015 seems optimistic when the industry is known for moving slower than an asthmatic ant with heavy shopping.3
Other restrictions on pensions are being relaxed, including:
- Flexible drawdown will now only require guaranteed pension income from other sources of £12,000 (down from £20,000).
- Capped drawdown limit increase from 120% to 150%, increasing the risk that people will exhaust their savings before death.
Some of these measures may sound sensible in isolation, but the simple truth is that with the average pension pot being around £37,000,4 the main beneficiaries of these changes will be well-off pensioners. What we really need is a fundamental root and branch review of the pensions system to come up with some serious measures to tackle issues such as increased longevity, the vast range and complexity of pension options and, most importantly, how to ensure that everyone has a reasonable level of income in retirement.
Energy and environment
We are fast approaching an energy crisis in the UK, both in terms of limiting the damage which energy use has on the environment and our ability to match supply to demand. The only way to fix these two looming problems is to support renewable energy, which is relatively clean (compared to fossil fuels) and ensures security of supply (Russia can turn off the gas pipeline, but stopping the wind, sun and tides is currently beyond them). Unfortunately, this message still hasn’t sunk in at the Treasury, and instead of serious support for renewables we have the following policy measures:
- Extending compensation for energy intensive industries for the cost of the Carbon Price Floor[note The CPF is a steadily increasing carbon tax paid by electricity generators] and the EU emissions trading system.
- Introducing a new compensation system for the higher electricity costs resulting from the renewables obligation and small-scale feed in tariffs.
- Incentives for investment in new gas capacity, plus a review of the tax treatment of North Sea oil and gas and new allowances for high pressure, high temperature projects.
The Treasury is undermining economic measures intended to force companies to reduce their energy consumption by cancelling out the price increases through compensation measures. Worse still, the top bands of Air Passenger Duty are being abolished, making some long-haul flights cheaper. So much for the ‘greenest government ever’.
One welcome relief for low-earners will be the first real terms increase (3%) in the minimum wage since 2007 - although this will only apply to ‘adults’ (youth and apprentice workers will have to make do with a 2% increase). Public sector workers will not be so lucky, with a 1% increase pencilled in for 2014-15 and 2015-16.
Booze and bingo
Beer duties have been cut, making a pint 8p cheaper than under the original plans. That’s right, a whole eight pence off a pint of beer! Even better, a bottle of Scotch will be 42p cheaper. No need to read any further, the Chancellor has definitely got my vote. Bingo halls - which the Treasury believes bring local communities together and contribute to British culture - are also to benefit, with a reduction in duty to 10%.
The Conservatives were so proud of these two measures that they launched an advert promoting them,[^beer-bingo] which promptly resulted in the usual explosion of satirical send-ups.
New one pound coin
According to the Royal Mint Counterfeiting Survey,5 3% of one pound coins in circulation are forgeries. As a result, the Treasury has decided that we need a ‘new and highly secure’ coin, which will be bi-metallic and have 12 sides. I’ve no idea why this is in the Budget, as it doesn’t relate to fiscal policy, but it has probably received more media coverage and comment than any other item.
Overall, this is clearly an election budget, full of giveaways and freebies for those most likely to vote Conservative in 2015 (and possibly this year in the local and European elections). From a short-term political angle therefore, I have to award top marks to Osborne for this budget. Unfortunately, the long-term picture is not so rosy. Someone will have to pay for the money being showered on pensioners, and so the outlook for my ‘jilted generation’ continues to worsen. Fundamental problems such as increasing longevity and climate change have not been properly addressed and, whilst it may be possible to spin an argument that the economy is recovering at the moment, the long-term picture is grim.
The maturity date of a bond is the date on which the borrower has to repay the bondholder. ↩
The fact that ISA income and capital gains are exempt means that you do not need to declare them to HMRC, nor do they take up any part of your annual tax-free allowances. ↩