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Highlighting news stories important to the Civic Republican
particularly those that are overlooked or little covered in the main media.
George Osborne’s plan announced in the Budget on Wednesday to free up how people spend or invest their pension pot has been widely acclaimed.
It is said to give freedom to people to be responsible for their own finances and was a long overdue reform. The fact that few doubts have been expressed in the mainstream media shows the extent that the Tory-led coalition’s economic and political agenda has been taken up and become received opinion.
One of the arguments supporting the move is that annuities repayments are now on the floor. Until now when you retired at pensionable age and you took the pension pot that you had saved up, you pocketed up to 25% of it and the rest you had to use to buy an annuity - yeilding you a derisory income
Skip the next section if you are familiar with how annuities work
Let’s be clear what an annuity means. Say, you have an accumulated pension amount of £200,000 at 65 when you retire.
You can, but are not obliged to do so, take out £50,000 and spend as you wish – say on a holiday, or more likely these days, pay off some debt you or your children have. The remaining £150,000 you use to buy an annuity.
An annuity is different from a normal placement of money in two ways:
The purpose of buying an annuity, rather than investing the money in a normal account that allows you to still have access to the capital, is that it should give you a greater monthly income.
The clever masters of the actuarial science that manage the annuities calculate that they can give you a significantly better return because quite a few of people who bought the annuities will die young and in any case they keep the capital amount in the fund for all of them - whatever age they die.
To make it worthwhile to buy an annuity thus the return it can give you over any other investment has to be significant. And the fact that, by buying the annuity, you are effectively disinheriting your children, means that the annuity has to look like an exceptionally good deal. Otherwise, what is the point?
Well, until now the point has been that you did not have any choice.
The following was the deal that the government offered. During your working life you saved money in a pension fund and this, the government wanted you to do, because for one thing it did not want you to become a burden on the state when you retired. If you have a more comfortable retirement you are less likely to get into financial problems and have to plead with the state for help.
To persuade you to save your money in a pension rather than in a normal savings account, the government made the amount you paid in every month tax free. The catch was that the pension you eventually collected through the annuity was taxed at normal rate – so what was the advantage?
The advantage was that, up until your retirement date, the pension pot rolled up tax free and so accumulated faster than a normal money placement did, that would be taxed every year. As a result of the delay in paying tax you thus paid significantly less tax on the whole deal.
[Gordon Brown when chancellor did undermine the scheme as I have outlined in 2000 when he abolished Advanced Corporation Tax but the general idea remained in place.}
With Osborne’s announcement, you are now not obliged to buy an annuity on retirement and can spend the whole of your accumulated pension fund as you wish. Although almost universally hailed as a good idea and a benefit to freedom and responsibility, this is in fact a very bad idea in principle.
The main argument used to support the change is that annuity rates are so low that they do not represent a good option and you might as well conserve your capital and place your money in a standard interest yielding account.
Well, yes, looked at from the point of view of the options on the table now, this might seem an improvement. But the point that we are missing is that annuity rates are derisory in historical terms [just like interest yields on standard accounts] because of deliberate government policy. If the economy were being properly run interest rates would not be so low.
Why have interest rates been kept low? There are two main reasons.
This is part of an overall plan. The government wishes to keep asset values high and, to promote this, it must achieve the corollary of high asset values which is to keep returns on investment low. So what you see, in high property values and low annuity returns [ie high annuity values], is all part of a plan.
What is the ultimate purpose of this strategy? High asset values benefit the wealthy, and its corollary - low returns - disadvantage the rest.
Hey, presto! You promote greater inequality. The banks are saved, the highly mortgaged are bailed out, the rest of us pay.
Which brings us back to the 2014 Budget.
The general media accept that annuities are currently low as if it is the result of some inevitable process that cannot be countered or avoided.
But low returns are a result of a deliberate strategy to make the less well off pay for righting the wrongs of the banks and their government puppets. It was neither necessary nor inevitable.
So what is presented as doing people a favour to help them, in the present avoidable bad situation, is in fact throwing them a temporary life line to get them through the next few years or less and encouraging them to ignore what happens after that.
And here we come up against what is driving the timing of this announcement: the 2015 general election.
People will be able to realise the cash in their pension pot now – right now. This will release spending into the economy and, quite obviously, will stimulate growth and employment. This will time perfectly for May 2015 enabling the government to point to some ‘healthy’ figures. The fact that the longer term income people needed will be reduced - or gone altogether - will not worry a government seeking another five year term.
The Who sang in 1971 “I won’t get fooled again”. How many of the 2015 voters will be able to join in that chorus?
We are witnessing one of the biggest cons ever perpetrated by a sitting government on an electorate.
With this pensions move the government has thrown away the whole principle of what saving for pensions is about.
There are two other obvious consequences that, in the absence or anyone else, to his knowledge, pointing them, your correspondent at the DRP Newsletter feels obliged to
Firstly, Osborne has at a stroke destroyed the whole rationale of saving for a pension as distinct from any other investment. He has changed the landscape of investment opportunities available. By saving over a number of year, or even by making a single placing, anyone can now accumulate their capital almost tax free [not completely thanks to Brown’s pension raid] and then take the whole capital out on retirement.
Pensions thus will no longer be special but just one other investment option.
And pensions as a vehicle for investment have another big advantage over the standard types – your money in a pension is safe from creditors - no matter what. This has always been the case to help ensure you will not be a burden on the state in your retirement.
This protection has now been handed over to a whole different class of investors/savers. Has this been thought through? Hardly, when your thinking only extends as far as the 2015 election.
Secondly, because you now have the option to take out a lump sum as 100% of your pension, your children may object or be put out if you decide not to do so, but, instead, buy an annuity.
As I have pointed out, when you buy an annuity you disinherit your children. [You need not disinherit your wife by the way as joint pensions for spouses are easily available.] It is easy to see how the option to buy or not buy an annuity will lead to stresses and strains within a family.
One of your children may want to buy a house, and there is this nice lump sum available because Osborne has now made it available. So, parents may come under pressure from sons and daughters to forego their future security to give their offspring a much needed start in life.
That resentments and fallings out will undoubted occur are obvious. Has this entered into the government’s thinking?
We need not ask.
What is more shocking than the Budget 2014 pension change is less the fact that Osborne has pulled them out of the hat but more the limp reaction of commentators.
The political and economic discourse in Britain is now being set by the government.
Basic principles of finance are being jettisoned to enable the government to survive and no one seems to notice – or care.
Never forget the comment by a senior Tory that the sole purpose of the Conservative Party is to be in government.
In this aim, principles do not apply. It may dress things up in the guise of freedom or growth or whatever, but its only real aim is to be in government and this is how practically everything it does must be interpreted – not least this pension announcement
Osborne is just being Tory type. No surprises there.
But are the rest of us really so dumb as not to see what is happening?
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The old website was drastically in need of an overhaul. We now have ready to launch a completely new improved website.
In addition the committee have been working on the strategy for the General Election 2015
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