Archive for the 'Osborne' Category

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How George Osborne is hoping to raid pension pots without you noticing

Sunday, January 10th, 2016

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Alastair Meeks, former chair of the Association of Pension Lawyers, looks at George Osborne’s plans for pensions.

When I qualified as a pension lawyer, my first boss used to say: “Alastair, when people hear the word ‘pension’, they think ‘old’, they think ‘grey’, they think ‘boring’.  But if every time you hear the word ‘pension’ you replace it with the word ‘money’, suddenly it seems so much more exciting.”  Today I’m going to talk to you about money.

We have now had five years of austerity and the deficit stubbornly refuses to close completely.  One of the most successful cost-savings measures was taken very early on, when the government changed the basis of inflation from RPI to CPI for public sector pension and most state benefits.  This saved billions – roughly £4.3 billion in 2015/16 alone and rising every year (a cumulative value of the order of £100 billion).  Not bad for a technical change that no one really understands.  The government may have found another similar technical change for pensions that no one really understands.

In the 2014 budget, George Osborne made a dramatic announcement relaxing the restrictions on taking pension money.  Since then, we have had a succession of announcements at budgets and Autumn Statements that indicate we are in the middle of a longterm plan to remodel the foundations of pension scheme taxation.  The reaction of most people when they read the words “remodel the foundations of pension scheme taxation” is to run away whimpering.  But never leave a Chancellor of the Exchequer with a deficit to plug alone with your money.  He may be about to commit grand larceny.

In 2014, the Chancellor announced that from 2015 pension pots could be cashed in in full, recognising the unpopularity of annuities.  This announcement was hugely popular with many of those coming up to retirement.  It was just as popular inside Number 11, because members who cash in their pension pots over and above the previous permitted maximum level pay tax at a high marginal rate, bringing in money into the exchequer and at a higher rate than would otherwise have been paid on the money coming out.  It constitutes an optional yet popular tax – perhaps the first since the National Lottery was launched.

But this was not just a money-raising venture.  A white paper accompanied the budget to explore how a balance could be struck between giving savers full access to their pension and making sure that they were fully informed about the implications of doing so.

(Financial education is the weak link in the whole reform.  Not enough people have the necessary knowledge to make informed decisions about their options and not enough pension pots are yet large enough to justify requiring everyone to pay for tailored advice.  The government has required generic guidance to be made available.  It remains to be seen whether that will be good enough.)

With a government declaration of intent that savers should be given better access to their own money, it was always likely that we would see a return to this.  Sure enough, the post-election budget trailed the possibility of a much more major change to pension taxation, bringing it into line with the tax regime for ISAs.  We are due to hear more about that in the next budget.  Hold onto your wallet.

It should be pointed out that aligning pensions and ISA tax regimes makes quite a lot of sense in the abstract.  Most people think about saving as a single activity.  Why should different forms of saving be taxed differently?  The difficulty comes in the detail.

At present, pension contributions are tax deductible, investment income and capital gains are also tax deductible, while pensions are taxed in payment – though a set level of lump sum is tax free (Nigel Lawson called this much-loved but anomalous).  In the new world where savers can take all their pension savings in one go, the tax regime strongly influences how in practice savers access their savings.

So, the government has floated the idea that in future we should get our payments from pension schemes tax free.  To make that work, contributions would be made from net pay, not gross pay.  Investment income and capital gains would remain tax exempt.  Savers could then get their hands on their own loot in whatever way they chose without having to worry about falling into taxation pitfalls.

Let’s leave to one side the administrative complexities of the transition (immense, if you must ask) or the problems that such a change would potentially cause defined benefit pension schemes (also immense).  Those are problems for pension geeks like me.  Instead, I’ll look at the implications for HMG.

If pension contributions are paid from net pay, tax receipts in the near future would be markedly higher in the short term than they otherwise would have been.  That’s handy for a government seeking to close a deficit.

Next, because contributions are paid from net pay, those who benefited from higher rate tax relief on their pension contributions would be disproportionately affected up front.  The government would have found a way to sting higher end top rate taxpayers right now.

Next, because pensions are paid in retirement at a time when most people’s income is lower than when they were in employment, the value of the tax foregone at the payment stage is considerably lower than the value of the tax currently being foregone at the contribution stage.  If, for example, you’re a higher rate taxpayer now and you expect to be a basic rate taxpayer in retirement, you won’t just lose out because you pay tax sooner, you’ll lose out because your marginal rate will be higher.

Finally, the government would have abolished the additional cost of the tax free lump sum without anyone even noticing, because the cost would be taxed at the contribution stage, not foregone at the payment stage.

I have no doubt that the Treasury has a clear idea of the improvement in the tax position that its floated reform would bring in.  I have no doubt that it is a very large number indeed.  The net cost of tax relief in 2011/12 is estimated by the Treasury at £38.3 billion, though others including the IFS have queried this figure.  The cost to the Exchequer of the tax free lump sum by itself has been estimated at £2.5 billion a year.  Even with the benefits coming in over time by transition, the numbers could be eye-popping.

Pensions professionals are generally quaking at the possibility of the change (admittedly for reasons of personal workload and aesthetics as much as anything else).  My expectation is that the government will push it through, simply because of the size of the tax gains to be made.  The fall-out is likely to be relatively minor.  Can you work out how much money you would stand to lose personally?  Nor could just about anyone else.  With a few well-chosen sweeteners, most people would be too uninformed to realise that they’d been robbed blind.

So watch out for this heist on 16 March.  It promises to be a record-breaker.

Alastair Meeks

Alastair Meeks is Pensions Partner at Pinsent Masons and has written books on the topic of pensions law.



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So what happened to the long-term plan, George?

Saturday, November 28th, 2015

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Labour’s current travails have hidden the Chancellor’s own problems

George Osborne is fond of saying that he’s fixing the roof while the sun is shining. Well, this week he decided to knock off early and catch some rays. After all, what’s the rush? It’s not going to rain overnight. Mañana.

Nor will it rain economically tomorrow, next week, next month and in all probability, next year. The economy is growing healthily, employment and wages are rising, inflation remains subdued, consumer borrowing is modest by historic standards and while there’s a house price boom in London, that’s largely down to local factors. There doesn’t seem much risk of either imminent overheating or a credit crunch.

Which is probably why when the OBR found £23bn down the back of George Osborne’s sofa, the Chancellor decided to spend pretty much all of it rather reduce the deficit faster. That spending – on tax credits amongst other things – has bought off plenty of political opposition, though at the cost of conceding the point.

All this is now easily forgotten. To be fair, it did happen nearly half a week ago and much has taken place since then. Above all, Labour has once again indulged in directing their fire at their own feet; something they’ve done so frequently since May that their lower extremities probably resemble Swiss cheese.

However, neither Osborne nor the wider government can assume that Labour will continue to be so self-absorbed and fractious for the whole of the parliament – or that if they are, some other party won’t find themselves capable of providing a decent opposition. Had one such existed now, Osborne would be under a fair bit of pressure and not only because of his U-turn.

Recessions do not run to timetables. We cannot predict the next one simply on the basis of when the last was; events play too large a role. Some of these events we can predict with a degree of accuracy: it’s possible to model for labour market tightness, private sector borrowing, house prices and so on. Other events, particularly those from overseas, can come out of the blue. Which is a problem for forecasters and tends to result in forecasts being projections rather than predictions (not least because even if you know that a bubble is going to burst, it’s almost impossible to work out when: in October 2007, just after Northern Rock had gone bust, the government was still predicting steady annual growth of around 2.5% and borrowing of about £40bn a year for the next three years).

And against that uncertainty, Osborne has kicked the can a little further down the road at a time when Britain’s deficit is still worse than it was before the last recession, public debt is vastly worse and interest rates remain at ‘emergency’ lows. In the big scheme of things the £23bn doesn’t matter much: over the parliament, it’s less than a penny per pound of expenditure. What’s more significant is the signal it gives as well as reducing future options.

Labour’s vacation of the centre ground (and indeed, the centre-left), combined with the Lib Dems’ near-annihilation has provided Osborne with an historic political opportunity to enable the Tories to dominate for years, as New Labour did and in like manner. The danger, as with Blair and Brown, is that the dominance in the centre comes at the cost of office-holding for its own sake which not only has a tendency to develop unhealthy relationships with client voting groups but also leaves a party lacking in ideological direction. Playing against sub-par opposition also allows laziness to creep into your own game.

The Conservatives have few excuses now: they’ll have run the economy for ten years by the next election, for five years by themselves. With Labour wracked by division, dissent and all-round incompetence, now should be the moment for Osborne to take the tough but necessary action to bear down further on the deficit. It won’t last forever.

David Herdson



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Alex Salmond tells the Commons about this morning’s PB Osborne betting tip

Wednesday, November 25th, 2015



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George Osborne’s first PMQs is a reminder of how strong his leadership chances are

Wednesday, June 17th, 2015

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Knowing the date of the PM’s departure could be the key

It’s a big day for George Osborne. Cameron is away so, as the First Secretary of State in the new Conservative Government, he will be taking PMQs for the very first time – a very clear statement of his position in the pecking order.

Looking back he has a lot in common with James Callaghan in 1976. It was widely agreed that in the LAB contest of that year he had a head start because he knew that Harold Wilson was going to resign and when that was likely to happen. Callaghan was prepared for Wilson’s shock announcement – the others weren’t.

Cameron going during this parliament will be less of a shock but the timing will absolutely crucial to the leadership election that will follow which maybe sooner rather than later.

Maybe a successful outcome to the EU referendum will be a key point. Wilson’s resignation came nine months after the 1975 European referendum.

All the focus in the current next CON leader betting has been on Boris with the Chancellor, George Osborne, some way down in the betting. This is crazy. In all of this Osborne has got one massive ace up his sleeve – his relationship with David Cameron who has given George a huge influence over the way the government operates and, crucially, which Tory MPs gets preferment.

Even more important in the view of insiders I’ve spoken to is that George is much more likely to have knowledge of and quite a lot of influence control over the timing of Dave’s exit.

    I was told last week that Cameron will go at a point which will most help Osborne’s chances.

Osborne is the political strategist behind the Cameron leadership and much of the credit for last month’s victory can go to him.

To my mind George should be favourite to succeed. I’ve been building up a position at odds of 5/1 and longer.

Mike Smithson





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Another PB betting tip comes good

Tuesday, June 25th, 2013

It’s not often that apparently long-term political bets come good very quickly and the bookies pay out.

Last Thursday I urged everybody to get on 3/1 that Ladbrokes was offering that George Osborne would be called Jeffrey in the Commons before the end of the year.

As it turned out someone did call Osbo just that before Ladbrokes had got their market up and quite rightly that was not counted.

But today at Treasury Questions Labour’s AB’s Anas Sarwar also used the Jeffrey word, which Obama had mistakenly called Osbo last week at the G8 meeting, and the bet became good.

Good on Ladbrokes for settling the market so fast.

Mike Smithson

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Who’ll go down least well with voters – EdM or George?

Saturday, September 29th, 2012



Is that what the election could come down to?

Some elections are won; most are lost. Rarely do the electorate have the luxury of two parties, both of which look like they could offer a strong, competent team which could govern well and lead the country forward in the way it would like. Sometimes they don’t have any and it’s a matter of choosing the least-worst option or opting out altogether.

It’s not inconceivable that 2015 may be a case in point. As Mike has commented on in several threads over the last few months, the combined leadership ratings of all three main leaders are at historically dreadful levels. The government’s approval rating in YouGov’s daily polls averages in the high minus thirties yet David Cameron remains the public’s preferred prime minister against Ed Miliband by some margin.

The point at which there was a step-change in the polling is not difficult to identify: after the budget, Labour’s lead jumped by five or six points and the government’s general rating slumped by around fifteen points and its economic management rating by twenty points.

The cause was almost certainly George Osborne’s enthusiastic jumping into the elephant trap Gordon Brown and Alistair Darling laid for him, when he increased the top rate of Income Tax.

Other PR difficulties didn’t help at the time but the decision to reduce the top rate by 5% had two deep and damaging effects for the government: it undermined the argument that we’re all in it together and it’s difficult to reconcile with the case for austerity, which makes the spending cuts seem ideological rather than a practical necessity.

The unforced political error of the income tax cut has been compounded by a failure to continually remind the public of the reason for the austerity programme: the structural deficit the Labour government built up, the boom they allowed and encouraged and the failed regulation they introduced. Although about 5% more still blame Labour than the Coalition for the cuts, that’s down from a 15% gap at the start of the year.

And yet for all the government’s problems and Labour’s consistent poll leads, both Miliband’s personal figures and Labour’s image ratings suggest an underlying weakness of their position.

Labour is doing well because it is not the government. The question is whether it will continue to do well when voters have to weigh their leaders as an alternative government.

The government – or Cameron specifically – does have one other card to play which is unavailable to Labour. Even if Labour had a tradition of replacing underperforming leaders, which it doesn’t, and even if the party’s mechanism made it relatively easy to do so, which it also doesn’t, it would be extremely difficult to justify a change when Labour’s ten points or more ahead in the polls. By contrast, it’s far easier to reshuffle a Chancellor.

David Herdson

 

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George needs to choose between politics and economics?

Wednesday, July 25th, 2012

Will the growth figures mean an end to his split jobs?

The two positive things for ministers about today’s third quarter of negative figures are that everybody is focused on the Olympics and because the commons is in recess there are not the usual Wednesday PMQs.

    But they won’t go away totally unnoticed and provide further ammunition for those who are questioning the government’s strategy and Osborne’s varied roles.

An added challenge is that the “blame the last lot” rhetoric lost a lot of it potency with the budget tax cuts for the very rich.

The GDP news comes after a period when George Osborne has been under great pressure and illustrious predecessors like Nigel Lawson have publicly raised doubts about the chancellor’s multi-roles in this government.

I don’t think that George’s position at the Treasury is under threat though Cameron will do something, surely, to take away some of his responsibilities.

    The problem is that with so much apparently going wrong with the economy that Osborne needs to be at least seen to be doing the job full-time

Will that happen? If Cameron is sensible it will.

Mike Smithson @MSmithsonPB



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Will YouGov fuel the Cable speculation?

Sunday, July 22nd, 2012
Preferred Chancellor Total
Vince Cable 22%
William Hague 16%
Ken Clarke 9%
Phillip Hammond 3%
Theresa May 2%
Nick Clegg 2%
Don’t know 47%

We’ve now got the full details of the Sunday Times YouGov finding on who those politicians it is thought would make the best replacement Chancellor for Mr.Osborne.

As can be seen there was a high don’t know element. By netting off the don’t knows we find that of those expressing a view 42% go for the 69 year old Lib Dem who is currently business secretary.

By a fair margin Cable was first choice amongst Labour voters and he came second to Hague with Tory voters.

    The political impact of this is that it will reinforce Cable’s position within his party.

The poll has the usual bad news for the current chancellor, George Osborne. 48% of those sampled thought he should be replaced with just 20% saying he should remain. Three weeks ago when the same question was asked the split was 45% to 24%. So Osborne net negative moves from -21% to -28%.

In the leader ratings there’s not much movement. Cameron is up a net 2 to minus 23% while Miliband is up a net one to minus 20%.

Clegg sees the biggest change up a net 6% from his low point of last week.

Mike Smithson @MSmithsonPB