The UK's pensions industry breathed a sigh of relief this afternoon as it learned the Chancellor of the Exchequer, George Osborne, would not be tinkering with tax relief on high earners' savings. But middle-income pensioners, by contrast, could end up being among the biggest losers from the Budget.
The Chancellor scotched previous speculation that the annual limit on tax-free pension contributions could be cut from £50,000 a year to £40,000. Osborne said there would be "no further changes" to the £50,000 limit, benefiting high earners who want to shelter from tax by saving money into a pension fund.
The pensions industry, which makes money by managing people's savings before they retire, reacted with delight to the decision, saying it preserved the principle that pensions are a tax-free form of saving.
Charles Cowling, managing director of advisers JLT Pension Capital Strategies, said it would have been "madness" to tinker with the limit. He added: "If we want to encourage pension saving, then making sure people are not double-taxed, once before retirement and once after, is essential."
He added: "Steve Webb continues to impress as Pensions Minister, and overall the Budget gets an eight out of ten for pensions."
Chris Aitken, head of financial planning at Investec Wealth & Investment said: “The most important part of the budget was what it didn’t contain, namely the reduction of tax relief on pension contributions for higher rate taxpayers. We have an ageing population and to abolish this incentive to save for the future would be idiotic."
But Ros Altmann, the director-general of Saga Group, which caters primarily to the over-50s, described the Budget as an "outrageous assault on decent, middle-class pensioners". This is because the Government has changed the tax allowances of certain elderly retirees.
In order words, it has preserved tax relief pre-retirement, but reduced it post-retirement. Nigel Roth, senior partner and tax specialist at Mercer, said: "Those [currently] in work will find that when they come to retire, they are paying more of their pensions in income tax."
These Age-Related Allowances, as they are known, increase the amount retirees can receive from their pension each year without paying tax on it, from about £8,100 to about £10,500.
Today the government has said it will "freeze" these from 2013 so that inflation erodes them away, though anyone born before 1948 will not be affected. The long-term aim, the government says, is to have pensioners' tax-free earnings allowance brought into line with everyone else's tax-free earnings allowance, and simplify the system.
In a statement this afternoon, Altmann said: "This Budget contains an enormous stealth tax for older people. Over the next five years, pensioners with an income of between £10,500 and £24,000 will be paying an extra £3 billion in tax while richer pensioners are left unaffected."
Elsewhere, the pensions industry welcomed news that two separate groups of pension funds are now working with the government on possible infrastructure investment programmes. One initiative, lead by the National Association of Pension Funds and the Pension Protection Fund, is aiming to raise £2bn from funds to invest in new projects, but only after the construction phase is complete.
The other, revealed for the first time today, is a separate group of "pension fund investors" that has "presented proposals to the Treasury for increasing pension plan investment in infrastructure in the construction phase."
The government also announced a consultation on the possibility of issuing gilts with repayment periods longer than 50 years, or possibly unlimited.
The industry has reacted with scepticism to this idea, and added to it this afternoon. Simon Hill, chief investment officer at Buck Global Investment Advisors, said: “The government’s move to consult on the introduction of 50 year and perpetual bonds, as opposed to any steadfast reforms, reflects the negative reaction this proposed initiative has received from the pensions industry."
George Osborne has handed big headline tax cuts to Britain’s wealthy in an “unashamedly” pro-business Budget, but faced a backlash from the elderly and the Tory press as he paid for his largesse with a £1bn annual income tax raid on pensioners.
The chancellor erected an “open for business” sign over Britain, announcing the end of the 50p top rate of income tax and a bigger-than-expected 2p cut in the main rate of corporation tax to 24p, bringing the prospect of a 20p rate “within sight”.
Mr Osborne claimed the measures were “an advertisement for investment and jobs in Britain”, saying the Budget would help create a platform that would allow the country to earn its way out of trouble.
The official forecasts showed the economy crawling back to health with growth of 0.8 per cent this year, rising gradually to 3 per cent in 2015. Mr Osborne was still on target to eliminate his favoured measure of borrowing two years later than originally planned in 2016-17, the independent Office for Budget Responsiblity said.
Sticking firmly to his to “Plan A” seven-year austerity drive, the chancellor said he had kept to his deficit plan. “This country borrowed its way into trouble. Now we’re going to earn our way out”.
Against a relatively stable economic backdrop, Mr Osborne’s Budget was intensely political with a raft of tax cuts offset by spending cuts and other tax rises. The most expensive reform was a £3bn lifting of the income tax threshold to over £9,200, benefiting more than 20m low- and middle-earners by £170 in real terms.
Mr Osborne hoped to win political cover for the reduction of the 50p income tax rate to 45p from April 2013 with a £500m package of measures to clamp down on tax loopholes, including ending a stamp duty dodge used by purchasers of top-end London properties.
But his claims that the Budget changed the backdrop for investment and jobs did not win the backing of the OBR, which said the Budget would have a “limited “ effect on the economy, raising output by only 0.1 per cent by the end of 2016.
The chancellor’s political strategy was in danger of unravelling on Wednesday evening after he revealed that he would extract more than £1bn a year from pensioners by freezing their tax allowances, a Budget surprise quickly labelled by Labour as “a tax grab on grannies”.
Ed Miliband, Labour leader, seized on the juxtaposition of cut in income tax rates for millionaires with a real terms tax rise for pensioners as evidence that Mr Osborne had “had the wrong priorities and the wrong values”.
The freezing of tax allowances for pensioners to bring them into line with other taxpayers – described by the chancellor as a tax “simplification” – was denounced by rightwing newspapers and immediately began trending on Twitter, sending concern through the Treasury.
“It is pensioners who are the biggest losers in today’s Budget,” said Joanne Segars, chief executive of the National Association of Pension Funds.
Despite the howls of protest from older people, Paul Johnson, director of the Institute for Fiscal Studies, noted that pensioners had escaped lightly from the government’s austerity measures so far. “Given the scale of the reductions to household incomes created by welfare cuts and tax rises, it is perhaps surprising that this is the first tax change specifically targeted on pensioners,” he said.
Some Conservative MPs admit that pensioners have been relatively shielded from austerity measures, but fear making the case in public for fear of alienating core voters. “Of course this is awkward, but somebody has to bite the bullet on this,” said one Tory MP.
Nick Clegg, Liberal Democrat leader, also fears a pensioner backlash, but hailed the crackdown on tax loopholes, a rise in stamp duty on sales of properties worth more than £2m and a big rise in the personal tax allowance as a victory for his party: “This is a Budget every liberal can be proud of,” he said.
Eddie Barnes of the Scotsman reports, Budget 2012: Pension age may rise to 80 in future, warns expert:
A child born today may have to work until they are 80, a leading insurer has warned, after Treasury documents showed Whitehall is struggling to keep pace with rocketing welfare costs.
The warning came after the Treasury revealed departmental spending would face an even greater squeeze on spending in 2015 and beyond than is currently the case if welfare costs are not reined in.
Chancellor George Osborne gave a clear hint yesterday that he intends to eat further into the mammoth welfare bill to limit the damage on other parts of government, saying it would have to be cut by £10 billion in 2016 alone in order to protect departmental spending.
It follows warnings last year from the Office for Budget Responsibility (OBR) that the UK is facing “unsustainable” debts over the coming 50 years as it tries to cope with the ballooning costs of an increasingly elderly population.
John Lawson, head of pension policy at Standard Life, said a child born this year may have to work through their seventies “if life expectancy at retirement rises in line with the last 30 years”.
He added: “We should brace ourselves for having to work much longer in the future. Unless we save a lot harder and are able to retire on our private pensions when we want to, many of us will still be working well into our seventies.”
The Treasury documents show that if spending on welfare, pensions and social care is left unchanged, core government budgets – including the Scottish Government’s grant – will be hacked back by 3.8 per cent from 2015-17, well up from the average 2.3 per cent they are dealing with at present.
The document warns bluntly: “The government will be examining the cost drivers for all areas of public spending, and identifying the further reforms needed to deliver a sustainable welfare system and public services within the resources available.”
That paves the way for a fresh hit on popular benefits. Experts said that, with many savings having already been squeezed out of the system, popular universal benefits for pensioners and the disabled could go next, with politically explosive results.
Other reforms look likely to include a further uprating in the retirement age, with Mr Osborne confirming yesterday he would introduce an “automatic” review of the state pension age, with a report on how it will operate to be published this summer.
The gloomy long-term prognosis came as the OBR offered Mr Osborne some short-term relief yesterday, suggesting he was on course to meet his target to reduce the country’s national debt mountain by 2015-16, and to balance the government budget over the next five years.
On the wider economy, the OBR said it expected the UK to avoid a double-dip recession this year, with GDP now expected to grow by 0.8 per cent this year. The figure is up 0.1 per cent from the OBR’s previous estimate in November.
The forecaster then expects Britain to grow by 2 per cent in 2013 and up to 3 per cent by 2016.
Mr Osborne will still have to keep borrowing every year to pay for public services, however, adding £126bn to Britain’s accumulated debts this year alone. As spending cuts kick in, and more debt is repaid, the OBR says those accumulated debts will begin to fall by 2015.
On the Budget measures announced yesterday, the OBR confirmed that the impact was “broadly neutral” on the public finances. However, with demand for public services rising every year, both the OBR and the Treasury say the UK faces continued financial difficulties in the medium to long term.
After warning of further cuts ahead, the Treasury published new figures on the likely scenario beyond the end of the current spending period which ends in 2015.
It said its own figures showed that “in the absence of policy change, departmental spending will continue to see significant real reductions in 2015-16 and 2016-17”.
Mr Osborne signalled some of the pain would land on welfare, but experts warned last night that further cuts to the welfare budget would be incredibly difficult, given the furore that has greeted existing cutbacks.
Neil O’Brien, director of the think-tank Policy Exchange, said: “Most of the easiest savings have already been banked and most of what is left would have to be targeted on removal of currently universal benefits, pensioner benefits or disability.”
He added: “On pensioner benefits, the politics of removing free TV licences, bus passes or the winter fuel allowance are difficult. Finally, further cuts to disability benefits would rile an already vocal disability lobby.”
Extra savings could be found in the longer term by a steady increase in the retirement age, after Mr Osborne confirmed in his speech that increases will now be regularly uprated.
The future fiscal challenge was laid out last year by the OBR, which warned that Britain’s ageing population will increase demand and lower tax revenues.
It warned: “In the absence of offsetting tax increases or spending cuts, this would eventually put public sector net debt on an unsustainable upward trajectory.”
Yesterday I wrote about how UK public sector pensions are getting squeezed. The UK Budget 2012 was more of the same, basically squeeze the poor, working poor, and now the disabled, and keep pandering to the banksters and hedge funds in the City, hoping some of their wealth will 'trickle down' to the commoners.
Below, Lord Norman Lamont , Former Chancellor of the Exchequer and MP, joined CNBC to discuss the 2012 budget presented on Wednesday by UK chancellor George Osborne.
Also, several hundred protesters are brought together by UK Uncut activists to form a dole a queue outside Downing Street. The aim was to recreate Saatchi & Saatchi's 1979 Tory election campaign 'Labour isn't working' poster to highlight rising unemployment under chancellor George Osborne's economic austerity program.