(Bloomberg) — The most eye-catching change announced by U.K. Chancellor of the Exchequer George Osborne in his budget today was the scrapping of most of the constraints on how new retirees can manage their pension savings.
Instead of being pushed to buy an annuity, 13 million savers in so-called defined contribution plans will be able to withdraw their funds gradually or in full. A 55 percent tax rate on withdrawing savings at the start of retirement will be eliminated and most retirees will face a 20 percent rate instead.
“People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances,” Osborne told lawmakers in Parliament in London. He said he was proposing “the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921.”
British insurers led by Legal & General Group Plc and Aviva Plc plunged on Osborne’s announcement. Prudential Plc, Resolution Ltd. and Standard Life Plc also declined, helping to erase more than 5 billion pounds ($8.3 billion) off the industry’s market value today. Just Retirement Group Plc and Partnership Assurance Group Plc, two smaller annuity providers, both slumped by more than 50 percent.
Because the Treasury expects many more new pensioners to take advantage of the greater flexibility, the policy is projected to raise money for the exchequer every year until 2031. Gains will peak in the 2018-19 fiscal year at 1.2 billion pounds ($2 billion).
For individuals allowed to withdraw their entire pension pot as a lump sum because they have only accumulated a small amount, the threshold will be increased to 30,000 pounds from 18,000 pounds.
“If you’re a maker, a doer or a saver: this budget is for you,” Osborne said.
The extra yield investors demand for holding 30-year gilts instead of 10-year securities increased after Osborne scrapped the annuity rule. Pension funds have tended to hold longer-dated securities to match their liabilities. The spread widened two basis points to 79 basis points.
With a year to go before national elections, Osborne also put other measures to help pensioners and savers at the heart of his budget, reacting to a period of historically low interest rates in which the Bank of England’s benchmark has stayed at 0.5 percent since March 2009.
Osborne announced that he’s making Individual Savings Accounts — a vehicle for tax-free saving — more flexible, and allowing people to invest as much as 15,000 pounds a year in both cash and stocks and shares. That’s an increase from 11,520 pounds. The changes will take effect July 1, the Treasury said.
As of January 2015, the U.K. will issue a new range of “pensioner savings bonds” for people age 65 or over. The rates will be finalized in Osborne’s fall budgetary statement to take account of prevailing market conditions.
The Treasury assumes at the moment that a one-year bond will pay a 2.8 percent annual rate, with a three-year bond paying 4 percent, with an investment limit of 10,000 pounds per individual aimed at 1 million pensioners.
The Debt Management Office said it expects deposits in National Savings & Investments, which also include premium bonds, to contribute a net 13 billion pounds to Treasury coffers in 2014-15 compared with 3.4 billion pounds this year. Osborne also raised the maximum holding for premium bonds, which offer the chance to win cash prizes.
“This was undoubtedly the budget for ‘silver savers,’” Ruth Porter, head of economic and social policy at the London research institute Policy Exchange, said in a statement. “Ending compulsory annuities and making it cheaper for pensioners to draw down their pots brings much needed flexibility to the system.”
Osborne also announced he will abolish the 10 percent tax starting rate for savings income and replace it with a 0 percent rate. The band will then be extended from 2,880 pounds to 5,000 pounds, aimed at supporting the lowest earners by removing the tax they pay on their savings income.
The Treasury also said it will raise the limits for Junior ISAs — children’s savings accounts — and Child Trust Funds to 4,000 pounds from 3,720 pounds on July 1.
ISA eligibility will be extended for the first time to peer-to-peer loans, and the government is considering extending the regime to include debt securities offered by crowd-funding platforms, which allows businesses to raise finance online.
–With assistance from Sarah Jones and Paul Dobson in London.
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