Budget 2014: Pension pot alert over lump sums

Alistair MacMillan with Ava, four, and Cole, two. Picture: Phil Wilkinson
Alistair MacMillan with Ava, four, and Cole, two. Picture: Phil Wilkinson
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PENSION changes announced in the Budget could lead to people taking massive lump sums when they retire and leaving themselves little to live on later, experts have warned.

Chancellor George Osborne is scrapping all restrictions on how people access the money built up in private pensions so that from next year anyone over 55 will be able to take the whole amount as cash.

But finance specialists warned that moving away from the situation where people use their pension pot to buy an annuity, which then provides a lifelong income, was undermining the purpose of a pension.

Mr Osborne told the Commons: “The tax rules around these pensions are a manifestation of a patronising view that pensioners can’t be trusted with their own pension pots.

“I reject that. People who have worked hard and saved hard all their lives and done the right thing should be trusted with their own finances. We will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots.

“Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, any time they want.”

But Andy Cumming, of Edinburgh-based Close Brothers Asset Management, warned there were dangers with greater flexibility in the way in which pensioners can access their retirement pots.

He said: ”The significant risk is that many will take an unsustainable amount of income early on which will reduce their income source later in life, potentially to nil.”

Other critics said the Chancellor’s move went against the spirit and purpose of pensions, which was to give individuals an income throughout their retirement. They said the change was aimed at raising additional tax revenue in the short term, but if more pensioners took all their retirement fund as a lump sum it could leave the state – already struggling to cope with the rising costs of an ageing population – to pick up an even bigger tab.

Mr Osborne also said people would be offered free, impartial face-to-face advice on what their pension options were.

Age Scotland acknowledged risks associated with the changes, but welcomed the greater flexibility and particularly the ability of those with several small pensions to cash them in and no longer feel forced to use their savings to buy an annuity.

Spokeswoman Rhian Thompson said: “Giving people a real choice about how and when to use their pension savings is the right approach.

“People tend not to retire just like that any more – sometimes they will work longer at reduced hours or take a less demanding job, so for people to be able to take their pension when it suits them makes more sense.”

She added that people regularly underestimated how long they would live.

“Those retiring now often have immediate calls on their savings such as interest-only mortgages and debts to pay off,” she said. “Work needs to start now to ensure these people will have assets to support them in very old age, that free financial advice is of a consistently high standard, and that the industry develops some good value financial options so people get the certainty they need for security in later life.” 
The Budget raised the personal allowance to £10,500 and also increased the 40p threshold and set a new higher limit on tax-free ISAs to encourage more saving.

The UK Government said the Budget measures mean the Scottish Government will receive more than £63 million under the Barnett formula on public spending.

Mr Osborne said forecasts for tax receipts form North Sea oil and gas had been revised downwards by almost £3 billion over the next four years - “a reminder of how precarious the budget of an independent Scotland would be”.

But Finance Secretary John Swinney claimed Westminster – in the last Budget before the independence referendum – had failed to deliver for Scotland.

He said: “This was Westminster’s last chance to show it could create opportunity for Scotland and reject the diet of austerity. This Budget confirms a further squeeze on public spending and a further austerity plan.

“The £63m added to the Scottish budget is small beer compared with the significant cuts Scotland has faced since 2010. The Chancellor is planning a further £37 billion of cuts across the UK over the next two years and tens of billions to come afterwards.”

Labour’s Margaret Curran said the Chancellor should have helped hard-pressed Scots with household bills and taxed bankers’ bonuses to pay for a compulsory jobs guarantee for young unemployed people.

Meanwhile, Edinburgh West Liberal Democrat MP Mike Crockart said raising the personal allowance to £10,500 would put an extra £100 back in people’s pockets. He said: “This tax cut is the real budget boost for working people and would not have happened without Lib Dems in government. The Tories are desperate to claim credit, but in reality their focus is on changes such as an inheritance tax cut for millionaires which we blocked.”

‘With two kids I can’t save a lot’

FATHER-OF-TWO Alistair MacMillan says there’s not much for him in George Osborne’s Budget.

The 36-year-old works as a sales adviser for a communications company and his income varies every year because it is made up of both salary and commission.

He says the extra £500 a year on the basic income tax allowance is more than outweighed by the £132 a week per child he is losing from the axing of child benefit from higher earners.

And he says he earns enough not to benefit from the raising of the threshold for the 40p tax rate.

Alistair, who lives in Colinton Mains with his partner and children Ava, four, and Cole, two, says they won’t benefit from new tax breaks worth up to £2000 per child to help pay for childcare because private nurseries are too expensive anyway.

And the increase in the amount of money which can be invested in tax-free ISAs will be no help to him either. “Even though I earn good money, with two kids there is not a lot left for saving.”

As a smoker, Alistair will have to pay more for his cigarettes, which rise by two per cent above inflation, but he is resigned to that. “It’s to be expected.”

He says fuel is far too expensive, despite the freeze on duty.

And he doesn’t expect to benefit much from the freeze on whisky duty and the penny off a pint. “I don’t drink a lot now I have the kids.”

Tea-Shop delighted by more help for exports

IT’S five years since city tea-shop Eteaket opened in Frederick Street – and business is booming.

The award-winning business – which set out to encourage a love of proper leaf tea – is now exporting to France, Belgium and Japan.

And it has just secured a new client in Hong Kong.

General manager Sarah Chanter, 28, says the shop was delighted with the promise in the Budget of more support for companies to export.

The Chancellor promised new help to give UK businesses access to the best export finance in Europe in order to win international trade contracts, doubling UK Export Finance’s direct lending programme £3 billion and cutting interest rates to the lowest permitted levels.

“Exporting is something we’re actively doing.” says Ms Chanter. “It’s growing year-on-year and it’s an area in which we are keen to expand. We think there is an exciting new market out there. So it’s great to know there is strong support for that.”

Ms Chanter says Eteaket, whose offices are in Duddingston, currently employs 11 people, but she welcomes measures designed to help small businesses expand and create more jobs.

She says: “We are a growing business, looking to take on new employees each year,”

An estimated 326,000 small and medium-sized enterprises in Scotland are expected to benefit from a package of initiatives including incentives for banks to lend to them.


CHANCELLOR George Osborne has come under fire for not doing enough on air passenger duty.

Under the Budget proposals, all long-haul flights will now carry the same lower rate of the duty paid for flying to the US.

But Scottish Nationalists said the change would not affect the vast majority of flights which will see APD rise again from April.

Edinburgh Western SNP MSP Colin Keir said: “The announcement doesn’t go nearly far enough to help those who fly on business or the tourist industry.

“Those flying from Scotland are still going to be heavily penalised, especially if they are linking with a long-distance flight. It’s clear that Westminster is paying no regard to the cries of business in Edinburgh and Scotland as a whole.”

Gordon Dewar, chief executive of Edinburgh Airport, said although the change announced by the Chancellor was a small step in the right direction, it would only affect a small number of passengers flying out of the Capital.

He said: “It will not have any fundamental impact on European passengers, who are our biggest market.

“We have said that we will support any plan to reduce or abolish air passenger duty.

“I am hopeful this decision will bring the APD debate to the forefront and reaffirm our commitment to offering our passengers the best for their money.”


By Gordon Henderson - Federation of Small Businesses senior development manager

The Federation of Small Businesses has been widely quoted lately stating that business confidence is up and small businesses are looking at investment, jobs and business growth. The recovery is a reality and this budget contained some measures focussed on making it sustainable.

A sustainable recovery needs business investment so it is good news that the Annual Investment Allowance for companies will be doubled to £500,000, allowing businesses to offset more of their investment against tax.

Key to the Edinburgh economy is the airport and its ability to attract new routes and travellers to the city; tourists keen to ride on the new trams, inward investors attracted by the newly reduced corporation tax rate, and also local business owners travelling in search of export opportunities. On the roads, business owners such as tradespeople will welcome the postponed fuel duty rise that will help keep costs down. The £200 million to fill the potholes our members tell us about so often is a UK fund and there are plenty of roads locally that are desperate for some of Scotland’s share.

Buried in the lengthy Budget red book is an offer by the UK Government to extend their feasibility study on improvements to the A1 north of Newcastle further north into Scotland, if the Scottish Government will match-fund the costs of this study. This looks like a very good deal that, if accepted, will go down well with the local A1 campaign group and could lead to a positive impact on the city region economy. If the announced measures to help businesses come to fruition then there will be opportunities for small businesses to grow.