Pensions are not rabbits, Chancellor, says RACHEL RICKARD STRAUS
Pensions are not rabbits, Chancellor, says RACHEL RICKARD STRAUS: If you’re considering changing the pension system, don’t just do it
On the hop: Chancellor Jeremy Hunt
Pensions are not rabbits. That should be pretty clear to you and me. But it is a truth that seems to elude successive finance ministers.
Jeremy Hunt was the latest to make this critical mistake when he delivered his Spring Budget statement last Wednesday.
As always with budget statements, it was a theatrical affair. The chancellor did the traditional staged pose with the red box on the morning of his statement, attempted comedy during his speech, and at times his speech was almost drowned out by the raucous cheers and jeers from the benches.
The highlight of the spectacle was – as usual – when the chancellor conjured a rabbit out of the hat.
In other words, he made a policy announcement few saw coming, designed to elicit oohs and aahs from ministers, voters and the media. Chancellors almost always do this – they can’t resist the drama of it. This time, Hunt’s so-called rabbit was a change in pension policy. The chancellor was expected to increase the lifetime allowance – in other words, the amount you can have on a pension without being subject to criminal tax if you withdraw it.
But he had not been expected to abolish the lifetime benefit altogether. He also increased the annual allowance by 50 per cent to £60,000 and raised the amount you can pay once you start taking money from a pension from £4,000 to £10,000.
Now the problem, as I said, is that pensions are not rabbits.
They are delicate creatures that don’t take well to being arrogantly scooped up under the belly and held aloft in front of an awed crowd.
If pensions were a beast, I think they’d be more like a leggy daddy. With spindly, delicate legs, they require careful handling and coaxing. They are complicated, nuanced and clunky. And they are already quite wounded by the magic tricks of previous chancellors. Gordon Brown meddles with dividends on final salary pensions; George Osborne’s retirement freedoms.
I am not saying that pension policy should never be changed. But if you’re going to do it, a surprise in a budget statement isn’t the way to go. Adjusting pensions always has unintended consequences. If you put it on the hoof, you won’t find out what the fallout is until later, by then it’s too late. But if you make changes through thoughtful deliberation, those ramifications will come to light before you move forward and you can decide if it’s still worth it.
For example, when the lifetime benefit was cut by former chancellors in previous budget statements, they failed to foresee that this would lead to senior doctors and advisers taking early retirement, and hurt the NHS.
Similarly, when previous chancellors used Budgets to hack the amount you can pay into a pension once you start withdrawing, they didn’t predict it would stop people who left the workforce during Covid from returning.
In last week’s Budget, the Chancellor also addressed the lump sum of 25 percent that savers can collect tax-free from their pension.
From April you can still withdraw up to 25 per cent tax free when you turn 55, but only up to a maximum of £268,275. He is the first chancellor to add an upper limit. What will be the impact of this change?
We do not know. That’s exactly the point. Once again, a Chancellor has introduced new complexity to pension policy into a budget and it is only now, in hindsight, that experts, policymakers and savers can poke through and try to understand what impact it will have.
But if I had to guess, I’d say it will have bigger consequences than he realizes. Hunt has further complicated the pension system and added another stipend that later chancellors can use if they’re feeling a little thin.
It creates another bit of uncertainty that makes it even more difficult for savers to plan their long-term financial future.
So here is my plea for future Chancellors. If you have to do theater in your budget run, choose something straightforward as a prop. But if you’re thinking about adjusting the pension system, don’t just do it.