Chancellor George Osborne “all but destroyed” the annuities market with yesterday’s (19 March) Budget announcement that from next April people with defined contribution pensions will be able to access their whole pot “without paying massive tax charges”, according to The Mail.
Currently, savers get 25 per cent of their pension pot tax free, but if they take the rest as a lump sum they would have to pay a 55 per cent tax charge on it. Under the new system, this tax charge will only be 20 per cent for basic taxpayers.
The Mail described Mr Osborne’s move as a “major blow” to the annuities industry that has faced “huge criticism from pensioners, politicians and the media alike for their failure to offer value for money to pensioners”.
FTAdviser reported yesterday on the impact for listed annuities firms, as panic gripped markets and six firms lost £3.2bn in value in just one hour.
Can pensioners be trusted?
The chancellor said he rejected “the patronising view that pensioners can’t be trusted with their own pension pots”.
According to the Guardian, the National Association of Pension Funds expressed dismay, flagging up that this government introduced auto-enrolment into pensions because of “concern about how few people plan adequately for old age”.
Joanne Segars, Napf chief executive, said: “People often underestimate how long they will live and overestimate how long their pot will last. There is a recognised problem with the lack of financial literacy in the UK.”
However, Hargreaves Lansdown was more optimistic, predicting the remaining taxes paid on lump sums would “encourage many to keep their money in pensions”, but also forecast that people would be “willing to save more for retirement” if they were free to use large sums when needed.
What will tax avoidance clampdown achieve?
HM Revenue & Customs has been cracking down on film partnerships and other schemes that use legal loopholes to cut tax bills. These schemes have been used by some of Britain’s richest bankers and footballers, according to the Guardian.
The chancellor said that making them pay tax upfront would net £4bn over five years. According to the Guardian, Bill Dodwell, head of tax policy at Deloitte, said the figure was “realistic”, pointing to “tens of thousands of cases”.
However, PricewaterhouseCoopers believes the potential revenue is uncertain and the money may ultimately “have to be repaid” if HMRC loses court cases – “with interest”.
Tax partner Alex Henderson said that the estimate of £4bn revenue is based on “quite a high” success rate of 80 per cent. He added: “It’s a way of bumping up his [Osborne’s] tax receipts”, which will reduce borrowing, the Guardian quoted.
Speaking to the Telegraph, Martin Lewis described the new Isas “a genuine boon for savers”, following the chancellor’s announcement that the tax-free Isa allowance will be raised to £15,000.
Mr Osborne also announced that cash and stocks and shares balances can be transferred between each other. Mr Lewis said the move by the chancellor was “canny”.