It is safe to say that the announcements' around pensions and savings flexibility that George Osborne made yesterday have come as a surprise to all of us!
George Osborne has completely revolutionised the way pensions work; millions of people have just found their pensions savings have turned into a tax efficient bank account. The punitive 55 per cent tax rate they faced if taking out more than they should from a pension has been abolished and the regular withdrawal allowed from a pension has increased by a staggering 25%.
Is this more of a political move than financial? 'It's a matter for people to choose how they spend their money,' said Danny Alexander afterwards - but the Treasury's forecasts assume that they will spend, spend, spend. If people can pull cash out of their pension, and only pay a normal rate of tax, HMT projects it will haul in £320 million more tax in 2014-15 rising to an almighty £1.2 billion more in tax by 2018-19 - which is fine for The Revenue in the short term but with people living longer what happens when all the individual's pension pots are spent? More reliability on the State Pension I fear.
For those pensioners who decide to plan spending their pension pot sensibly then an annuity or a limited income drawdown could still be of value. With the promise of one year government bonds with an interest rate of 2.8% or a three year bond offering 4% (albeit on a limited offer basis), there is also a step change for older savers when you consider how low the Bank of England base rate is.
But it is not just existing pensioners who benefit. The fact that people are not forced to buy an annuity will benefit those coming up to retirement most. Those planning for retirement now have far more flexibility about how they structure their retirement. While increasing the ISA limit to £15,000 helps those trying to save up a deposit for a house or a flat.
These changes also mean that Osborne can have his cake and eat it when it comes to interest rates. He can tell mortgage holders that it is thanks to the government's fiscal policy that the Bank of England has been able to keep interest rates so low while pointing those from our more senior generations to the higher interest rates that the government is making available to them.
What's critical is that individuals continue to build a pension pot in the first instance which is why the Auto-enrolment scheme is so important. Employers, by law will have to provide a pension scheme to staff - and have everything in place quite soon - or face the financial consequences.
And the Final thought?
This budget delivers some extremely good news for savers and those who prefer to save for themselves rather than rely on the state. However, we fear that the newfound pension flexibility will lead to a "spend now, pay for it later" mentality which will cause similar if not worse long term problems to those that individuals and the country as a whole have experienced from the explosion in credit card debt and other personal loans.
Without sound advice and a good deal of personal restraint The EB Partnership fear that the Government could be inviting a short term boost to spending at the expense of both our individual futures and those of the nation.
