A decade of pension freedoms

SNEAK PEEK

— Ten years since Osborne’s pension freedoms announced.

— Rachel Reeves outlines a Labour economic recovery.

— Treasury Committee looks at HMRC loan charge.

Good morning readers! Today we’re looking back on the ten years since Osborne introduced pension freedoms. How the world’s changed since then … We’ve also got a preview of a Rachel Reeves speech and the latest on MPs looking into dodgy tax schemes and their consequences. 

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DRIVING THE DAY

POPPING CORKS: Today marks ten years since then-U.K. Chancellor George Osborne introduced pension freedoms. The move was a genuine “rabbit out of the hat” budget moment when it was announced in March 2014, and a decade on everyone is still talking about it. Read James’ great story here.

What is it: In his 2014 spring budget, Osborne announced the pension freedoms — a landmark piece of legislation that meant as of April 2015, millions of pensioners over 55 are free to use their pension cash however they like, and enjoy a tax-free withdrawal on 25 percent of it. Until that point, they had been forced to use it to purchase an annuity, which guarantees an income. 

Vroom vroom: Then-pensions minister Steve Webb raised eyebrows nearly a decade ago when he said he wasn’t that concerned if pensioners spent their retirement savings on a Lamborghini and ended up on the state pension. Considering the chunky depreciation value of Audis and the like (probably more realistic motor purchases by U.K. retirees), anyone regretting their spontaneous sports car acquisition may not get much to fund their retirement if they’re later forced to sell it. 

Lambo no-no: There’s no suggestion that retirees spend all their money the minute they turn 55, but the freedoms have been wildly popular, with £72.2 billion withdrawn “flexibly” from pensions since they were introduced. The total amount taken out has risen each year since then, with over £12 billion expected to be taken out this tax year. 

Webb told us: “Fears of people blowing the lot on a Lamborghini have proved unfounded; in many cases, the sort of person who has been frugal enough to save a decent pension tends to manage it carefully and draw it slowly — many pensioners don’t spend all they have, preferring to be cautious.” 

But: There were, and still are, accusations that the government of the time rushed to implement the policy, with no formal consultation launched for industry to have their say. This did lead to problems, such as Osborne’s decision to only give workers a 12-month window to transfer out of public sector pension schemes — which led to a rush to do so, with thousands now at risk of being stuck in less stable defined contribution schemes.

Another but: The other is the £71.2 million redress bill for the 8,000 British Steel Pension Scheme members who were coerced by financial advisers to transfer out of gold-plated pensions after the freedoms opened the floodgates to transfer. 

MFS U.K. view: The freedoms have been successful in allowing retirees to access and spend their hard-earned pensions. But rushed policymaking was always going to end in tears for some, especially those paying the price by having lost most of their retirement savings.

WHAT’S ON

Chancellor Jeremy Hunt faces the Economic Affairs Committee in the Annual Scrutiny Session, 3 p.m. 

Rachel Reeves gives annual Mais Lecture, 6:30 p.m. London.

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ECONOMY

REEVES REVS UP: Shadow Chancellor Rachel Reeves will outline a “new chapter” for the U.K. economy in what MFS U.K. hears is an hour long (!) speech at the annual Mais Lecture in the City of London this evening. Reeves will set out how an incoming Labour government will deliver Britain’s economic recovery on “strong and secure foundations” to unlock growth and spread prosperity. 

The ghost of Chancellors past: A week after former Labour Prime Minister and Chancellor Gordon Brown called for a shake-up of the Treasury, Reeves will use her speech to announce a No.11 reset. The reforms are set to include bolstering the Enterprise and Growth Unit that was set up under the last Labour government, and integrate it into the budget and spending review processes alongside fiscal and spending departments in the Treasury. 

The idea is…if the Unit is embedded with Treasury teams then it will help No.11 come up with better policy ideas to boost the ever-elusive economic growth in the U.K. Only last month, the Institute for Government noted that the Unit is widely seen to be underpowered, its influence diminished compared to 20 years ago, and it is not involved in the management of fiscal events. 

Growth: Reeves is expected to say that the Treasury must be ready to “get to work from day one” to bring economic growth back to the U.K., and will pledge to work with the City and businesses as they are the “lifeblood of economic growth is business investment.” She will close her speech by stating that the U.K. economy stands “at an inflection point” and the solution “lies in wide-ranging supply-side reform to drive investment.”

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TAX

LOAN CHARGE LATEST: The taxman doesn’t expect individuals who may have accidentally avoided tax to pay back more than half their disposable income per month, Jim Harra has told MPs. In a letter published by the Treasury Committee today, Harra confirmed that HMRC would continue to request money from individuals for the “loan charge” issue — a policy introduced by HMRC to crack down on historical dodgy tax schemes called disguised remuneration (DR) — even though there have no arrests for those pushing the tax avoidance facilities.

The history: Starting in the 2000s, tens of thousands of self-employed workers signed up to a remuneration scheme, and were paid their salaries in loans via offshore trusts. Many did so because a tax adviser told them to — unaware they were being paid from trusts often used to evade tax. HMRC decided it wants the unpaid tax back. But many of those involved have argued that tax advisers presented these schemes as legitimate, so they shouldn’t be to blame. About 50,000 people have been affected and HMRC has admitted there have been 10 suicides linked to the loan charge.

What Harra said: The chief executive of HMRC said he recognizes some people were given “false assurances” but that the tax department does “not have any estimates of how many DR scheme users entered into schemes ‘unwittingly.'” And, most importantly: “The motives of those engaging in tax arrangements do not affect whether tax is due under the rules passed by Parliament.” In other words, it’s up to MPs to stop the taxman going after these people.

The numbers … Harra told MPs in the letter that users of the scheme earned on average twice as much income as the average U.K. taxpayer. The median settlement for disguised remuneration schemes is £19,000 for individuals and £205,000 for companies. Around 40,000 individuals and 5,000 employers have yet to settle.

Muted: The usually outspoken Harriett Baldwin, MP and chair of the Treasury Committee, said: “I hope the information contained in Mr Harra’s response makes a useful contribution to the public debate.” 

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RETAIL FINANCE

REGULATORS SEEK TO IMPROVE DEBT COLLECTION: The FCA and other regulators have released a statement calling on firms to improve debt collection practices. Released yesterday with Ofcom, Ofwat and Ofgem, it sets out expectations such as making sure a customer in debt doesn’t receive excessive amounts of communication, and that they are clearly pointed to free debt advice. If firms fail to meet standards expected of them, the FCA will take “robust action,” it said. In 2020, the financial services regulator fined companies £90 million for failures in this area, resulting in consumers receiving over £570 million in compensation.

WHAT WE’RE READING

The FCA has fined a trader £6 million euros and banned him from operating in the industry, because of his involvement in a sham refund trading scheme, reports Bloomberg.

The FT reports Deloitte will undergo a huge reorganisation to cut costs, after choosing not to split its audit and consulting businesses.

The Singaporean state fund may buy a $50 million stake in Monzo, reports Sky News.

Thanks to: Fiona Maxwell and Izabella Kaminska.

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