Changes to pensions are radical but investment initiatives are scraping the barrel - EY ITEM Club

19 March 2014

  • Share

Peter Spencer, Senior Economic Adviser to the EY ITEM Club comments:

“There was very little macroeconomic news in this Budget - the big improvements were flagged up by the OBR in the Autumn Statement.  The economy will regain its previous peak later this year and hopefully regain a bit of balance.  GDP will be £16 billion higher and borrowing cumulatively £24 billion lower by 2017/18, but in macroeconomic terms that’s small beer. Like 1p off the price of a pint you might say.

Changes to pensions are “radical”

“At least this left the Chancellor time to talk about more far-reaching reforms.  The changes to defined contribution pension drawdown arrangements are certainly radical and although they are likely to increase drawdowns (and conveniently increase tax receipts) in the short term, they could increase pension savings and indeed the overall household saving rate by making this form of investment more attractive. The idea of saving in order to purchase a retirement annuity was looking progressively less attractive as annuity rates reached rock bottom and recent inflows into personal pensions and AVCs have been disappointing.

Investment and energy measures take sting out of “cost of living crisis”

"The Chancellor is planning to take £7 billion off the bills of major energy users, which should help to keep them in business here and should shave a few pounds of household energy bills.  With inflation remaining at or below the 2% target and the labour market recovering nicely, this will help to take the sting out of the perceived cost of living crisis. The housing measures are also commendable, particularly with respect to new build, helping to keep up the much needed momentum provided by last year’s HTB equity loan scheme. This was extended to 2020 as announced earlier in the week, helping to remove the uncertainty faced by the builders.

Investment initiatives are scraping the barrel

"However, the Treasury’s investment initiatives continue to disappoint. The Chancellor really had to scrape out the barrel to muster £370millions of extra infrastructure spending, which is paltry besides the billions in Pension and Sovereign Wealth funds that he could tap.  The extension of the Annual Investment Allowance is welcome and will extend the help SMEs. However most of these do not invest more than the previous £250,000 and few of them will be in a position to benefit by the doubling of the limit. Indeed most capital investment is made by large companies that will hardly notice this change.  The macroeconomic effects will be minimal.

Tax allowances will relieve pressure on millions dragged into 40p band

"The Chancellor extended the personal tax allowance to £10,000 this year, taking 3 million out of the tax net. This threshold is to be increased by another £500 next year.  Had he been really keen to relieve the pressure on hard working families he would have used this cash to increase the Lower Earnings Limit for National Insurance instead.  However, the benefits will at least be felt higher up the earnings scale this time, helping to relieve pressure on the millions in the middle of the earnings scale that have been dragged into the 40p band by the Chancellor’s persistent freeze on top rate tax thresholds."

For more information on the 2014 Budget, visit the EY 2014 Budget page.