March 19, 2014 2:34 pm

Budget 2014: What sweeping changes to pensions and Isas mean

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Such radical moves are a gamble. Here’s why

The Budget heralds fundamental and far-reaching changes to pensions and savings regimes in the UK. Five key issues to consider are:

It is your money. The changes to the defined-contribution pension system sweep away many of the rules and limits that deter people from saving into pensions in the first place; participation in workplace pension schemes has been falling despite the £20bn a year net cost of pension tax relief.

Similarly, the changes to the ISA regime – merging cash and stocks ISAs to create a single product and increasing the total limit to £15,000 – give savers more choice over where they put their money.

Putting consumers first. The government’s plans to enshrine the right to free impartial advice on how best to crystallise a pot of pension savings suggest it has lost patience with the pensions industry, which has faced stark criticism over its charges and practices.

Times have changed. The days when employees saved into defined benefit schemes for multi-decade periods, and enjoyed secure pensions linked to their salary at retirement, are gone. These changes are a recognition of that. Defined-contribution schemes – where the outcome is dependent on savings rates and investment returns – are now the norm outside the public sector, and the government needed to make them more attractive in order to support auto-enrolment.

In depth

UK Budget 2014

UK budget in depth

George Osborne’s fifth Budget seeks to help ‘hard working’ families and offers a big package to help savers

Simplicity is vital. In recent years, ISA savings have increased steadily while pensions have stagnated. Previous reforms to the ISA regime, such as scrapping “insurance ISAs”, have resulted in increased contributions. Simplifying pensions will increase their popularity.

It is still a gamble. Allowing pension savers to take more money out of their accumulated funds without facing punitive tax charges does run the risk that more savers will outlive their pension funds and become dependent on the state in old age. The government seems to be hoping that a step-change in savings rates – Britons save around half the amount Germans do – will be more than enough to cancel out that risk.

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