The Sunday Times today reported:
If you have an annuity which pays you 100 per year and you have a 25 year life expectancy the Treasury will have to wait a quarter of a century to take all its income tax rake from that 2,500. If, on the other hand, you sell the annuity today you accelerate when Treasury gets the tax (moving it from years one-twenty five to year one); but you reduce the amount of income subject to tax (you get considerably less than 2,500 because of the time value of money). The real scandal, though, is that Treasury will treat all of the money in year one as new income available to fund tax cuts. Of course it isn’t; it’s tomorrow’s income which we’re spending today.
I wrote here about how the sleight of hand works. And this will be the fourth huge sleight of hand – giving the impression of more tax receipts without there actually being more tax receipts – in this Parliament. I wrote about a £3.5bn trick around bank losses here. I wrote about the same £4bn trick around accelerated payment notices here. I wrote about the same £3bn trick around pensions ‘freedom’ here.
Selling your annuity will be a bigger sleight of hand than any of those.
The Tories will use it to give the impression that they have delivered a country in rude fiscal health. And that we can afford tax cuts. But neither of those things is true.
The media is ignoring this story: I guess they figure it’s too complicated for the likes of us. The Labour Party is ignoring it too: I can only assume they think the same. But it could hardly be more important; please spread the news.
Waiting for Godot 
I doubt there are many people for whom it will make sense to swap the certainty of a retirement income for the rest of their life, for a much smaller up-front lump sum, particularly after the sum is taxed. I guess we will see the misselling claims in 5 to 10 years.
But what is the tax treatment of the person who buys the annuity? Presumably they are taxed on receipt of the annuity payments? They should get a deduction for the amount they pay to buy it. Does the price have to be capitalised and spread? Is the annuity fair valued each period? Or do we wait for tax until the receipts exceed the price paid?
I suppose one advantage to getting tomorrow’s income today (even with the interest rate problem mentioned in earlier posts) is that it could be used today. Were it to be used for infrastructure investment then there would be a benefit in having the bridge built today and aiding the country (and its economy) today and tomorrow rather than building it tomorrow and only aiding tomorrow. The problem, however, is that it doesn’t seem to be going to be used like this. [Apologies if this point has been made in comments on previous posts]
Entirely a fair point. My gripe isn’t so much that we’re accelerating money to today; it’s more that we’re ignoring that we won’t have it tomorrow..
Where the lump sums are spent on deposits for children/grandchildren to get an unfair leap onto the housing ladder, presumably those children/grandchildren will ensure the retiree’s financial needs (absent an annuity) are thereafter taken care of?
It’s true that allowing withdrawal of a capital sum from the pension pot now will result in less income from it later. Whether this results in government taking tax today and foregoing it tomorrow is true only up to the point that tax WOULD have been payable tomorrow.
It is precisely where pensions are small that it might be most attractive to take the money as a lump sum up front, or likely that it will be. If you would never be able to afford a retirement cruise on an occupational pension of £100 a week, it might well seem rational to forego £5 a week of it so that you can have that once-in-a-lifetime experience. After all, from an income point of view what difference is a fiver going to make in the long run?
From a taxing point of view this fiver a week as income over years would probably not generate any tax at all, as the total pension income would be below the personal allowance. So a real rabbit has in fact been pulled out of the hat as tax is paid on this part of the pot that otherwise would not have been paid, and government creates income for itself now that it would not have got in the future.
This might have informed the policy thinking and also provide a superficial reply to criticisms that sleight of hand is creating only the illusion of more tax, or obscuring that we will have less tax tomorrow. As actually it might be demonstrable that we will have more tax today and no less tomorrow.
What this ignores of course is the balance between tax and spending, and that the fiver a week that is not in the hands of a low-income pensioner over years to come is likely to have to be made up by government spending on services that the individual is unable to pay for herself. This might be in the form of housing benefit, care services etc …
A full cost/benefit analysis and indeed an accurate presentation of the fiscal consequences of the policy would have to take this into account too.
All true; but no more true of selling an annuity as deciding to forego choosing one in the first place, which HMT calculated as yielding £3bn.
Oh indeed, the moot point being the extent to which calculations fully model the likely impact on both tax and spending or whether they simply establish differences in gross tax yield which as you rightly point out will largely comprise mere time-shifting.
What I am worried about is who is going to pay for this in 20 years when the money has been spent? There is a real intergenerational issue here and it cannot always be a case that the younger generation will pay. Lots has been said elsewhere about their falling opportunities compared to earlier generations. Is this not skewing things further?
The baby boomers have had it good, only mildly impacted by the recession and profited greatly from the housing market. Now George wants them to have their Lamborghini too in return for voting Tory, paid for in 5+ years time by today’s youngsters.
I find it deeply unattractive I have to say
I was thinking you could change the name of this blog to “no more waiting for tax” in honour of the new vogue for advancing tax receipts and calling it new Revenue. Am really excited to see today’s “policies”. Go budget day. Wooo.
Exactly. This use of what are actually a form of savings means that more reliance on debt must surely fuel whatever economy exists in the future. Also, we may have to see inreased state spending on pensions as a result. No doubt state provision will ‘take the strain’.