Citiwire blog – Budget thoughts
by Dr. Ros Altmann
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Pensioners are the forgotten victims of this crisis and the Budget needs to include measures to help them. The policies introduced to revive the economy actually amount to taking money away from older savers and pensioners to give it to younger borrowers and bankers.
Most pensioners have no mortgage, so they can’t benefit from cuts in interest rates and, indeed, these rate cuts actually make them worse off.
Pensioners have a very high marginal propensity to consume and survey evidence is now showing that they are cutting back their spending because their income has been cut – in many cases they are forgoing meals to save money! Their inflation rate is much higher than the rest of the economy, as shown by the IFS figures.
The changes I would like to see in the budget:
- Reform pension credit rules assuming over 10% interest being received on savings:
Adjust the interest rate assumption which currently assumes pensioners with savings over £6000 are earning over 10% interest on their capital! The calculation should assume zero interest for the moment, at least until rates go back up again in future.
- Reform pension credit earnings disregard rules penalising earnings above £5 pw
Anyone earning over £5 a week and claiming pension credit will lose between 40% and 100% of that income. So, the poorest pensioners who try to work longer to help improve their income are the ones most penalised by our state pension system. This is crazy!
- Issue long-dated index linked and longevity/mortality gilts
Pension funds are being damaged hugely by the crisis as QE has artificially depressed long yields, which inflates liabilities. This is storing up inflation problems for the future too. In the meantime, pension funds or annuity providers cannot match their liabilities. They are desperate for long-dated safe Government paper to help fund their liabilities, the Government is desperate to raise money to fund its own deficit, so surely this could be a win win.
- Allow pension withdrawals and allow pension to be undone if means testing would bite
Might help pension confidence if people can withdraw some of their money (paying a penalty, or only to the value of their tax free cash). At the moment, the idea of a ‘locked box’ is too frightening for many. Also, if the pension can be ‘undone’ at retirement, then if people find the means test penalises them they can take the money and spend it, but at the moment they are stuck.
- annuity reform – nobody can sell an annuity to someone unless they can demonstrate they have considered the vital questions
The biggest scandal relates, in my view, to people retiring now who have seen the value of their pension funds plummet and now find that QE is forcing annuity rates against them. They end up with less pension for life and could be buying at a terrible time. The Government forces people to buy an annuity, then forces the price against them! This cannot be right, but people don’t get advice, don’t understand annuities and end up stuck with the wrong product, bought at the wrong time, for the rest of their life. A 65 year old retiring today would get over 30% less pension that his friend who retired last year, just because of the movements i markets and annuity rates.
Government should reform the rules to regulate annuity purchase as a proper sale. At the moment, all you have to do to sell an annuity to someone is get them to tick a box and send the form back! They then pay 1-2% ‘commission’ and get stuck with a product that may not be right for them, but which they can never change. The FSA is asleep in its duty here.