Budget 2014: Good news for savers and pensioners – if they're rich enough
The news that the amount you can put away in a tax-free individual savings account will rise to £15,000 from July is, perhaps, the most obvious point to take from George Osborne's self-termed "Budget for Savers". But the surprise announcement about pension liberation was the most dramatic change the Chancellor announced.
He plans to overhaul the pensions system: to put the right to decide what to do with a retirement nest-egg into the hands of individuals. Or, as he put it: "What I am proposing is the most far-reaching reform to the taxation of pensions since... 1921." It's all about handing over personal responsibility, so we will all eventually be forced to make our own decisions affecting our financial futures.
Mr Osborne's announcements are all aimed at those who save sensibly – and tax-effectively – whether it's in individual savings accounts or the retirement savings accounts known as pensions. Savers have a lot to thank the Chancellor for today – but insurers will be fuming.
Read more: The Independent's Budget coverage in full
It is the concept of pension liberation – the right for people not to have to buy an annuity with their retirement savings – that has hit insurance firms. Companies that make up the so-called "at-retirement" industry – which mainly make profits from flogging annuities – saw their share prices plummet after the surprise Budget announcement. Specialist firm Partnership fell by more than 50 per cent while Just Retirement slumped more than 40 per cent.
The top five UK pension giants – including names such as Aviva, Legal & General and Resolution – saw some £3bn wiped off their value, as investors reacted to the effective freeing up of the pensions market.
However, the news was good for financial advisers, as more people are likely to want professional help in deciding what to do with their pension pot, despite the Government promising that retirees will be given free face-to-face guidance. Finance firm Hargreaves Lansdown climbed 14 per cent on the news, for instance.
But the savings news should cheer everyone apart from insurance company shareholders, shouldn't it? The answer is no, because not everyone can afford to save. In fact, the average amount stashed in an Isa at the moment is only around £4,000, so an awful lot of savers already can't afford to make full use of the existing tax-free allowance.
That suggests the measure to increase the Isa limit to £15,000 from July – along with the increase in the amount you can put into Premium Bonds – is aimed squarely at the well-heeled, who currently find the £11,520 limit unsatisfactory.
The move comes after mounting calls for Isa rules to be relaxed, backed by Nationwide Building Society, which published research this week showing that one in eight (12 per cent) of people aged over 45 with a stocks and shares Isa have considered transferring these funds into a cash version, but could not do so.
Interestingly, recent analysis by the Institute for Fiscal Studies shows that young people save nothing because they're building up their income or paying off debt first. Those in their late thirties and forties save modestly, but people in their fifties and early sixties really get into the savings habit. In short, Mr Osborne's Budget for Savers is actually a Budget for well-off older folk.
The freeing up of the pensions market will give the 320,000 people who retire each year with defined contribution schemes the right to choose whether or not to buy an annuity. That, on the face of it, is good news – but in practice it's only good news for those who have saved up decent-sized pension pots. In other words: well-off older folk, again.
The new Pensioner Bonds, which will offer market-leading rates from next year at an estimated 2.8 per cent for a one-year bond and 4 per cent for three years, will also benefit older people who can afford to save.
It's probably just a coincidence that these are the people most likely to turn up at the poll booth come election time. And the pension rule change will come into effect in April 2015, just a month before the next general election. In short, it's a vote-winner aimed at those who are most likely to vote.
However, that doesn't mean it won't benefit others. Making pensions more flexible – by scrapping the need to buy an expensive and poor-paying annuity – will make pensions more attractive and may go some way towards reversing the trend among younger people not to bother with retirement saving at all.
Questions of cash: Make the most of the changes
How can I get the biggest benefit from these changes?
Save more. If you have savings then putting them into a tax-free wrapper is common sense. The Chancellor has simplified individual savings accounts (Isas) — renaming them New Isas — by increasing the annual limit to £15,000 from July and allowing holdings to be kept in cash, shares or funds, or any mixture of all, with transfers allowed from shares to cash as well as the other way around. This is a massive improvement and makes ISAs much more attractive.
So will I be better off putting £15,000 worth of my savings into one straight away?
Actually, in the short term, not that much. With savings rates currently so low, it's calculated that ploughing the larger allowance straight into an ISA will only yield an extra £30 worth of interest in a year. Of course, in the long-term the benefits of tax-free savings will mount up cumulatively and if you use your allowance in full each year, the difference could eventually be quite marked.
What about pension changes?
If you're retiring after April 2015 you suddenly have an extra lot of financial decisions to make. Before your retirement date you should find out about your options and what you should do to ensure you get the best outcome for yourself, whether that's stashing as much extra cash into your pension pot as you can now, or finding out the best ways to invest your cash when you get it.
Are the Pensioner Bonds worth a look?
The Chancellor promised they will offer market-leading rates when they are launched by National Savings & Investments next year. While the actual rate will depend on what happens to interest rates between then and now, he estimated that a one-year bond would pay 2.8 per cent while a three-year bond would pay 4 per cent.
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