Pensions are not rabbits, Chancellor, says RACHEL RICKARD STRAUS: if you’re thinking of changing the pension system, don’t do it hastily
On the agenda: Chancellor Jeremy Hunt
Pensions are not rabbits. This may be quite obvious to you and me. But it’s a truth that seems to elude successive Chancellors of the Exchequer.
Jeremy Hunt was the latest to make this crucial mistake when presenting his spring budget last Wednesday.
As always with budget statements, it was a theatrical affair. The Chancellor did the traditional showmanship posing with the red box the morning of his statement, attempted comedy throughout his speech, and at times his speech was nearly drowned out by cheers and hoarse boos from the pews.
The height of the spectacle – as usual – was when the Chancellor pulled a rabbit out of her hat.
In other words, he made a political announcement few saw coming, designed to elicit oohs and aahs from ministers, the electorate and the media. Chancellors almost always do – they can’t resist the drama. This time, Hunt’s so-called bunny was a change in pension policy. The chancellor was expected to increase the lifetime allowance – in other words the amount of money you can have in a pension without being punitively taxed when you withdraw it.
But it was not expected that it would completely abolish the lifetime allowance. It also increased the annual allowance by 50% to £60,000 and increased the amount you can pay once you start withdrawing 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 can’t stand being cavalierly picked up under their bellies and held aloft in front of an awestruck crowd.
If pensions were an animal, I think they would be more like a leggy daddy. With spindly, delicate legs, they need to be handled and cuddled with care. They are complicated, nuanced and delicate. And they are already hurt enough by the magic tricks of previous chancellors. Gordon Brown’s interference in final salary pension dividends; George Osborne’s retirement freedoms.
I am not saying that pension policy should never be changed. But if you’re going to do that, a surprise in a budget statement isn’t the way to go. There are always unintended consequences of changing pensions. If you do it on the hoof, you won’t find out the fallout until later, by which time it will be too late. But, if you make changes through thoughtful consultation, those consequences will be revealed before you go ahead and you can decide if it’s still worth it.
For example, when the Lifetime Allowance was cut by former Chancellors in previous budget statements, they did not anticipate it would lead to early retirement of senior doctors and consultants and harm the NHS.
Similarly, when previous chancellors have used budgets to hack into how much you can pay into a pension once you start making withdrawals, they didn’t predict that it would stop people who had left the work during Covid to come back.
In last week’s budget, the Chancellor also meddled with the 25% lump sum that savers can withdraw from their pensions tax-free.
From April you will still be able to withdraw up to 25% tax free once you turn 55, but only up to a maximum of £268,275. He is the first Chancellor to add a cap. What will be the impact of this change?
We do not know. This is precisely the point. Once again a chancellor has introduced new complexity to pension policy in a budget and only now, after the event, can experts, policy makers and savers sort through and try to understand what impact this will have.
But if I had to guess, I’d say it will have bigger ramifications than he realizes. Hunt introduced even more complexity to the pension system and another allowance that subsequent chancellors can choose from when they feel a bit thin.
This creates yet another uncertainty that makes it even harder for savers to plan for their long-term financial future.
So this is my appeal to future chancellors. If you need drama in your budget statement, choose something simple as an accessory. But if you are considering changing the pension system, please don’t do it hastily.