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12 Oct 2016

Watchdog for UK Budget warns of £5bn pensions gap

Recently published analysis from the Office for Budget Responsibility suggests that former chancellor of the exchequer George Osborne´s pension reforms have left a £5 billion deficit in public finances, the Financial Times reports.

During his time as chancellor, Osborne introduced a host of pension reforms; and although he was recently removed from the Treasury by Prime Minister Teresa May, it seems his decisions will have a lasting impact on savings across the country.

The OBR looked at the many changes to how pensions and savings are treated in terms of tax, as well as the new freedoms given to savers wishing to access their retirement funds. Essentially, the body concluded that the pensions reforms have made pensions a less appealing savings option - particularly for high-income households.

Osborne removed the requirement for private pension holders to buy an annuity upon reaching retirement, and gave pensioners the ability to sell existing annuities on a secondary market.

Furthermore, limitations on the annual pensions allowance and lifetime allowance lowered annual tax-free pension contributions to £40,000 and lifetime contributions to £1 million. Meanwhile, the individual savings account limit was raised, and several new types of ISA were introduced - such as the Lifetime ISA - which were thought to rival traditional pensions.

While the reforms have had some short-term positive impact, there could be significant damage in the long run, according to the OBR - including the equivalent of 3.7% of GDP being added to public sector net debt over a period of 50 years.

It stated that the Government´s “significant changes to the tax treatment of private pensions and savings,” along with the introduction of “top-ups on specific savings products,” has “shifted incentives in a way that makes pensions saving less attractive — particularly for higher earners — and non-pension savings more attractive.”

As Whitehalls´ official spending Watchdog, the OBR´s warnings are being taken very seriously. Steve Webb, director of policy at Royal London investments group, said that the shift in balance displayed by the report - “with pension savers seeing cuts in support and greater incentives for short-term savings” - was “very odd” for a society that already has a negative relationship with long-term saving.

Copyright M2 Bespoke 2016

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