Pension freedoms based on 'uncertain assumptions'

Pensioners in a row More choice for pensioners in the Budget - but at what cost to the taxpayer?

The Budget's pension changes are based on "highly uncertain assumptions", according to a respected think-tank.

The Institute for Fiscal Studies (IFS) questioned estimates about the increased tax revenue the new scheme would initially generate.

But it said the plan was "one of the biggest shake ups seen in a long time".

IFS Director Paul Johnson said the liberalisation had clear advantages and would give pensioners new freedoms to make choices over their own affairs.

He added: "It will likely increase the incentive to save in a pension."

Chancellor George Osborne expects the pension changes to increase government revenues, at least in the first few years, because more people will be able to make taxable withdrawals from their funds.

Analysis

It is a familiar Budget ritual.

There are headlines on the day and scrutiny of the detail on day two. The Institute for Fiscal Studies says the Treasury has fallen into "bad habits" by planning tax cuts up front to be funded with less certain revenue-raising measures further down the line.

The IFS says the old chestnut of cracking down on tax avoidance is one example of unpredictable tax-raising assumptions.

There is debate around the Treasury's assumption that the liberalisation of the pension market will raise revenue. But Treasury sources have been out and about defending the numbers in the Budget papers.

They are determined to avoid a repeat of Budgets where measures look flakier the day after the big speech.

The government predicts increased income tax receipts of up to £1.2bn in 2018-19, based on an assessment that 30% of people in defined pension contribution schemes will opt to take out their pension at a faster rate than via an annuity.

'More expensive'

But Mr Johnson, said that "depends on highly uncertain behavioural assumptions about when people take the money".

The IFS calculates that the increased tax receipts will peak in 2018/19 and then decline. Within 20 years the policy will actually be increasing the deficit.

The chancellor's changes are partly a response to worries that annuities - the most common option for current pensions, which offer a guaranteed income for life - are not giving customers the best value for money.

But Mr Johnson said the new rules could create even bigger problems.

"It will likely make annuities even more expensive for those who do want to buy them.

"The market will become much thinner and there will be greater levels of adverse selection - only those expecting to live a long time will want to buy an annuity, thereby driving up the price.

David Cameron and children More generous child care, but the IFS wonders if it makes a difference
Permanent give-away

Gemma Tetlow IFS director of pensions, saving and public finances research said: "The chancellor has been getting into some bad habits of late with a series of policies that weaken and increase the risk to the long run public finances.

"In this latest budget he has a £5bn permanent give-away matched by temporary takeaways and uncertain cuts to spending."

The IFS also said that increased choice for pensioners in the way they managed their pensions could lead to more mistakes.

People aged 60 or 65 are known to underestimate their own life expectancy and especially the likelihood of living to extreme old age, he explained.

The chancellor has dismissed fears people might "blow" their pension pots, adding that pensioners were "responsible people who are capable of making decisions about their future".

An extension to tax-free childcare has also been criticised by the IFS. The scheme has "been made more generous but magically, at no extra cost," Mr Johnson said.

Smoker exhaling Smokescreen - increasing tax on smokers brings in far less than it should

IFS Senior Research Economist David Phillips said that it was debatable whether £7bn spent annually on child care was money well spent, "as there is little evidence as to whether it increases adult employment or improves children's outcomes."

'Chopping and changing'

The IFS said that some of the tax increases would not be as effective as they appeared. An increase in the tobacco duty should in theory raise an extra £795m .

But it said the real number it is only likely to raise £135m because smokers will respond to the increase by cutting down, giving up or smuggling cigarettes.

Mr Johnson praised the "consistency" in increases to personal income tax allowances, and reductions in corporation tax, but criticised "chopping and changing" in business policies like investment allowances.

Cuts in savings taxes were also welcomed, but Mr Johnson concluded the Budget still "leaves us with as little sense as we had before of quite how the very large public spending cuts still in the pipeline will actually be delivered".

More on This Story

From other news sites

More Business stories

RSS

BBC Business Live

  1.  
    07:10: East Coast sale

    Inter City Railways, as the Stagecoach/Virgin consortium is named, says the deal will bring 23 new services from London to key destinations, and 3,100 extra seats for the morning peak times by 2020.

     
  2.  
    07:00: East Coast sale

    A consortium made up of Stagecoach and Virgin have won the franchise to run the East Coast main line.

    East Coast
     
  3.  
    06:54: Rémy Cointreau
    Rémy Cointreau

    Cognac maker Rémy Cointreau reports a 15% drop in operating half-year profit, to €102m. The French group says it "remained adversely affected by evolving consumption patterns in China," by which it means that officials are having fewer Cognac-fuelled soirées.

     
  4.  
    06:50: Falling oil prices BBC Radio 4

    Speaking of balancing budgets, a number of analysts think Opec won't be able to reach an agreement on cutting oil production (which is needed to stop the supply surplus that is driving the oil price down) precisely because of a number of members have already done so - Iran has cut production by 1 million barrels a day as a result of international sanctions. Moreover, some members, such as Venezuela and Nigeria, simply can't afford to do so.

     
  5.  
    06:40: Tibetan tapestry
    Silk

    The latest entry in our Live Page series of artwork sold for exorbitant amounts is this 600-year-old Tibetan silk tapestry. It fetched $45m at an auction in Hong Kong - a record for art from the region. The good news is that the buyer will put the colourful thangka - which depicts the meditational deity Raktayamari, and was created during the Ming dynasty between 1402 and 1424 - on public display at a museum in Shanghai.

     
  6.  
    06:24: Falling oil prices
    Opec

    Here's an image that the delegates at Opec will be familiar with. It outlines the price per barrel of Brent crude oil that some states need to see in order to balance their budgets.

     
  7.  
    06:24: Falling oil price BBC Radio 4

    The main item on the agenda at the Opec meeting is the falling oil price, and what to do about it. BBC economics correspondent Andrew Walker says lower demand has pushed the price down, caused by a slowdown in industrial production in the eurozone and China. But US oil production - thanks to fracking - is also at its highest since 1986 and that is putting pressure on the price of Brent crude as well.

     
  8.  
    06:20: What is Opec?
    Opec

    The Organization of the Petroleum Exporting Countries (Opec) is holding talks in Vienna later today, on how to address the 30% fall in crude oil prices since June. Our colleagues have put together a 60-second explainer that will tell you what the meeting is all about.

     
  9.  
    06:10: Thomas Cook Radio 5 live

    Anne Richards, chief investment officer at Aberdeen Asset Management, tells Wake Up to Money that Harriet Green's shock departure from Thomas Cook yesterday doesn't feel "pre-ordained", and as a large shareholder, her company will be asking for an explanation. Thomas Cook's share price slumped 17% following the news.

     
  10.  
    06:02: Matthew West Business Reporter

    Morning. We should also be getting details of who the East Coast Mainline is being sold to this morning too. According to the Mirror newspaper, the government has decided upon a French consortium which includes Kelios - ultimately owned by French state rail operator SNCF. Will bring you that announcement when it happens. As always get in touch via email at bizlivepage@bbc.co.uk or on Twitter @bbcbusiness.

     
  11.  
    06:00: Joe Miller Business Reporter

    Good morning. A cross-party report is understood to have recommended giving the Scottish Parliament new powers to set income tax and control some welfare payments. The report was commissioned after David Cameron, Ed Miliband and Nick Clegg promised shortly before the independence referendum that Holyrood would be given new powers, if people voted to stay in the UK. Stay tuned for more details.

     

Features

  • Afghan interpetersBlacklisted

    The Afghan interpreters left by the US to the mercy of the Taliban


  • Prosperi in the 1994 MdSLost in the desert

    How I drank urine and bat blood to survive in the Sahara


  • photo of patient zero, two year-old Emile OuamounoPatient zero

    Tracking first Ebola victim and and how virus spread


  • Iranian Foreign Minister Mohammed Javad Zarif (left) and chief nuclear negotiator Abbas Araqchi wave to journalists from the Palais Coburg in Vienna (22 November 2014)Waiting game

    Journalists watch as nuclear talks go to the wire


From BBC Capital

Programmes

  • The challenge is to drop a bottle of water within 100 metres of this dummyClick Watch

    The race to get water – transported by drone – to a man stuck in remote Australia

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.