On the hop: Chancellor Jeremy Hunt
Pensions are not rabbits. That may be pretty obvious to you and me. But it’s a truth that seemingly evades successive Chancellors of the Exchequer.
Jeremy Hunt was the latest to make this crucial mistake when he delivered his Spring Budget statement last Wednesday.
As always with Budget statements, it was a theatrical affair. The Chancellor did the traditional staged posing with the red box on the morning of his statement, attempted comedy throughout his delivery, and at times his speech was almost drowned out by the raucous cheers and jeers from the benches.
The height of the spectacle – as usual – was when the Chancellor pulled a rabbit out of the hat.
In other words, he made a policy announcement that few saw coming, designed to elicit oohs and aahs from Ministers, the electorate and the media. Chancellors nearly always do this – they can’t resist the drama of it.
This time, Hunt’s so-called rabbit was a change to pension policy. The Chancellor had been expected to increase the Lifetime Allowance – in other words the amount of money that you can have in a pension without being taxed punitively when you withdraw it.
But he hadn’t been expected to scrap the Lifetime Allowance altogether. He also increased the annual allowance by 50 per cent to £60,000 and increased the amount you can pay in once you’ve started withdrawing money from a pension from £4,000 to £10,000.
Now the problem, as I say, is that pensions are not rabbits.
They are delicate creatures that do not take well to being cavalierly scooped up under the belly and held aloft before an impressed crowd.
If pensions were an animal, I think they would be more like a daddy longlegs. With spindly, delicate legs, they need careful handling and coaxing. They are complicated, nuanced, and fiddly. And they’re already pretty wounded from the magic tricks of previous Chancellors. Gordon Brown’s meddling with dividends on final salary pensions; George Osborne’s pension freedoms.
I’m not saying that pension policy should never be changed. But if you’re going to do it, a surprise in a Budget statement is not the way.
There are always unintended consequences to tweaking pensions. If you do it on the hoof, you will only find out what the fallout is later, by which time it’s too late. But, if you make changes through a thoughtful consultation, those consequences will come to light before you go ahead and you can decide whether it’s still worth it.
For example, when the Lifetime Allowance was cut by former Chancellors in previous Budget statements, they did not foresee that it would lead to senior doctors and consultants retiring early, and hurting the NHS.
Similarly, when previous Chancellors used Budgets to hack away at the amount you can pay into a pension once you have started to make withdrawals, they did not predict that it would stop people who had left the workforce during Covid from returning.
In last week’s Budget, the Chancellor also meddled with the 25 per cent lump sum that savers can take from their pension tax free.
From April, you will still be able to withdraw up to 25 per cent tax free once you turn 55, but only up to a maximum of £268,275. He is the first Chancellor to add an upper limit. What will be the impact of this change?
We don’t know. That’s precisely the point. Once again, a Chancellor has introduced new complexity to pension policy in a Budget and it is only now, after the event, that experts, policy makers and savers can pick through and try to understand what impact it will have.
But if I had to guess, I would say it will have greater ramifications than he realises. Hunt has introduced yet more complexity to the pension system and another allowance that subsequent Chancellors can pick away at when they’re feeling a bit skint.
It creates yet another bit of uncertainty that makes it even harder for savers to plan their long-term financial futures.
So here is my plea to future Chancellors. If you need to do theatrics in your Budget statement, pick something straightforward as a prop. But if you’re thinking about tweaking the pension system, please – don’t do it on the hop.