>"I was gobsmacked.” Ros Altmann summarises her reaction to the Budget last year, when the chancellor first outlined his dramatic plans to bring pension freedoms to all. On the afternoon of that Budget day, Altmann, a pensions expert and campaigner, adviser to successive governments, and investment manager and economist, could barely contain her excitement when she detailed her thoughts on George Osborne’s announcement. “Almost speechless,” she wrote. “After so many years of waiting for good news, suddenly so much comes at once.”
Her reaction to Osborne’s “Savers Budget” last week was less straightforward. While praising the chancellor’s decision to introduce a £1,000 savings income tax-free allowance for basic rate taxpayers (higher rate taxpayers will only receive a £500 allowance, and top rate taxpayers will receive nothing), and for allowing people to sell their unwanted annuities, Altmann had less kind words for the lowering of the lifetime pensions limit – which will fall from £1.25m to £1m.
“It’s a draconian change,” she says. When I spoke with her before this year’s Budget, she was calling for the lifetime limit to be scrapped entirely. If your pension fund rises above it, you will face penal rates of taxation. And in Altmann’s view, all this does is punish people for investment success and make it next to impossible to determine how much you should be contributing into your pension in the first place.
Nevertheless, pension freedom is about to arrive. From next month, over a year after Osborne first unveiled his plans, the law will no longer require people to turn their private pension funds into an annuity. Whereas previously only those with large funds could leave their pot invested while taking an income, now that freedom will be extended to everyone. Those aged 55 or over can even take their entire pension fund as cash.
It can’t be often that pensions policy raises pulses. But while every major political party supports the end of compulsory annuitisation, the prospect of people withdrawing all of their pension in one go has sparked heated debate – and not simply over the practicalities of the policy itself. It’s raised the far more fundamental question of how far people can be trusted to make decisions in their own interest. Critics worry that we’ll see a wave of irresponsibility, as pensioners splurge years of long-term savings on a cruise or a Lamborghini, leaving nothing to support themselves with in old age.
Altmann, however, is more optimistic. “If people have been responsible enough to save a reasonable amount in a pension fund, I think they’ll be responsible enough to want to use it to support themselves in retirement rather than blow the lot just because they can get the money out.” And the system is carefully-designed. Aside from the 25 per cent which you can take tax-free, the rest will be taxed as income when it’s withdrawn. So if you’re withdrawing £200,000 in one go, you will face far higher tax rates than if you take out £10,000 each year. “It’s clever. It’s a builtin disincentive for you to do something that is probably not in your best interest,” says Altmann.
And the other major change – the abolition of the pernicious 55 per cent death tax – makes it even less likely that spend-thrift pensioners will take their money and run. “Pensions are now the last money you should ever spend. Spend your Isa, spend your house, but don’t spend your pension,” says Altmann. Arcane rules governing how pensions were taxed when inherited by loved ones have been swept away. The 55 per cent tax on inheritance incentivised spending your pension before you died, but now your funds can be passed on as a family pension. “If you need it, it’s there. If you don’t, it goes on tax free.”
Altmann’s views on the subject have weight, and not only because she’s been involved in the debate surrounding UK pensions policy for well over 30 years. She’s looked at the issues from perhaps every perspective imaginable. Many will know her as the former director-general of Saga, the financial services and holiday company focused on serving the needs of older people. But she’s also worked as an academic, an economist and investment manager, and as a campaigner for people who have been failed by the pensions system. And although she is currently serving as the government’s business champion for older workers, Altmann is no Conservative stooge. She worked on the Myners Report and consulted for the Number 10 Policy Unit under the last Labour government, and in the 1980s advised the Social Democrats – alongside Mervyn (now Lord) King, the former governor of the Bank of England.
Why did she first get involved in pensions? “I could lie to you and say I’d always been burning to look at them all my life. But it wouldn’t be true,” she says, laughing. It was a more prosaic decision – when deciding what to focus her PhD on, Altmann’s supervisor drew her attention to a new dataset that could offer a fresh perspective on pensioner incomes. And she soon found a problem she was itching to solve. “It was clear that there was a problem with pensioner income, and there was a great potential for private pensions,” she says. The baby boomers were still young, but a point was rapidly approaching when the system would have to encourage higher levels of private saving to tackle the pensioner poverty she was seeing in the data.