OBR: Osborne’s pension reforms to cost 3.4pc of GDP

George-Osborne-BW-700.jpgGeorge Osborne’s long-term savings policy will add 3.7 per cent of GDP over the next fifty years, bringing short-term reductions in borrowing but costing the nation billions over the longer term.

That is the damning perspective of the Office for Budget Responsibility on the former Chancellor’s six years of pension and long-term savings reforms in a report published today.

The OBR says in the long term Osborne’s pension and long-term savings plans, which included cuts to tax relief, the creation of a secondary market for annuities and the introduction of the Help to Buy Isa and Lifetime Isa, as well as increased Isa limits, will cost the nation £5bn a year.

The OBR says over the five-year periods covered in Budgets and Autumn Statements, the estimated yield from reducing generosity on private pensions slightly exceeds the estimated cost of increasing it for other savings. But, it argues, some of the private pensions measures only bring forward receipts from the future, whereas the cost of some of the savings giveaways will continue to rise over the long term. It says its central estimate suggests the small net gain to the public finances from these measures over the medium-term forecast horizon becomes a small net cost in the long term. Cumulated over a period of 50 years we estimate that small cost would add 3.7 per cent of GDP to public sector net debt.

The OBR says the costing of the pension flexibility measures introduced in 2015 is not representative of its longer-term effect. It says that while it raises revenue in the early years as early withdrawals are subject to income tax, this is at the expense of tax that would have been paid when those same funds were drawn down in the future.

UK private pension wealth rose by 55 per cent in the six years from the introduction of pension simplification, according to OBR figures, rising from £2.9 trillion for the period July 2006 to June 2008, when it represented 34 per cent of aggregate household wealth, to £4.5 trillion in July 2012 to June 2014, when it constituted 40 per cent of all wealth. That £4.5 trillion is split almost evenly, between £2.3 trillion being drawn down and £2.2 trillion in accumulation.

The OBR anaylsed the costing to 2034/35 of each of the 10 private pension and savings measures introduced since 2010.

The OBR says predictions that the secondary annuity market will raise £1.1 billion across 2016-17 and 2017-18 carry a high level of risk of not proving accurate.

The OBR reduced its Help to Buy Isa cost estimate from £2.2bn in the five years to 2019/20 to £1.7bn, as a result of lower than expected interest in the product.

It says take-up of the Lisa is expected to come from four main groups: those affected by the lowering of the pensions’ annual allowance and lifetime allowance; current non-employer sponsored personal pension savers for whom this is a better deal; existing Isa users that may choose to switch from other products; and prospective first-time house buyers.

It also cautions that the reduced lifetime allowance may divert some high earners’ cash into the housing market, pushing up property prices.

The OBR report says: “Pension funds can only be drawn down once, so every early withdrawal reduces the amount of taxable withdrawals in future years.

“The net effect on the public finances is positive in the early years, peaking at £2.3 billion in 2018-19 before turning negative from 2021-22 – the year after our March 2016 forecast horizon.

“This net cost continues to rise in cash terms, reaching £5 billion by 2034-35.

“Expressed as a share of GDP – a more relevant metric when considering fiscal sustainability – the net cost builds up until it reaches a steady state toward the end of the period of just over 0.1 per cent of GDP.

“If that steady-state effect was to continue to the end of our usual long-term projection horizon of 50 years, that seemingly small cost would add 3.7 per cent of GDP to public sector net debt.”