Gain today- pain tomorrow; Ralph Frank on Freedom and Choice


Gain and pain


There is a remarkable consistency across each of the policy measures being enacted under the ‘freedom and choice’ banner.  The estimated impact of each measure on the Exchequer serves to accelerate the payment of income tax on the affected savings in the short-term, with a related drop-off in the long-term.  The acceleration also serves to increase the overall level of tax collected in the immediate future due to marginal income tax rates increasing as taxable income rises.


The freedom and choice revolution started with the 2014 Budget.  The policy costings associated with that Budget anticipated an increase in income tax receipts of over £3bn, due to the introduction of freedom and choice, by the end of the 2018/19 tax year.  Actual income tax collected is running around £200m ahead of forecast in the first year of the freedoms, according to the March 2016 update from the Office of Budget Responsibility.  The increase in tax receipts was forecast, in the 2014 Budget, to last until 2030 whereafter tax receipts would be around £300m per annum lower than under the prior system.  The additional tax paid is a simple redistribution of assets from savers to the State – effectively putting a price on freedom for those who make the choice.


The next phase in widening the freedoms is the proposed introduction of the secondary annuity market.  The assessment impact contained in the HMRC consultation about the market expects an increase in income tax revenue of close to £1bn in aggregate across the 2017/18 and 2018/19 tax years.  However, this bout of fiscal doping has a shorter life than the 2014 measures, turning into an expected loss of tax revenue of over £100m per annum as early as the 2019/20 tax year and beyond.


The impact of the freedom and choice changes is not limited to the direct financial consequences either.  The regular tinkering with and increasing complexity of the UK pensions system has created uncertainty in the minds of savers and providers.  Confidence in the system is consequently being undermined with a knock-on effect on savings’ rates.


Private saving, with the corresponding reduced reliance on the State, has been in secular decline in the UK.  Most savers are not expected to provide enough for themselves over their lifetime in retirement.  Automatic Enrolment (“AE”) had made a start towards addressing this shortfall but is widely acknowledged as being insufficient in isolation.  However many steps forward AE represents in trying to address the savings shortfall over the long-term, freedom and choice represents a few steps back as it both accelerates and increases the related short-term income tax take.


The long-term pain that will result from freedom and choice is not limited to savers, in the form of a lower after-tax income in retirement for many who exercise their freedom.  The State might well be impacted too, in a number of ways: the accelerated tax receipts reduce Government revenue in later years; lower post-tax private retirement incomes might result in greater reliance on the State; and the diminished confidence in the savings system might lead to lower savings’ rates, with a resulting fall in tax receipts from these savings when ultimately consumed.  Why is the sub-optimal long-term outcome being ignored in the dash for short-term cash?

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , . Bookmark the permalink.

2 Responses to Gain today- pain tomorrow; Ralph Frank on Freedom and Choice

  1. Brian Gannon says:

    Really good article. I confess to being more Keynesian than monetarist but feel that all political parties are adopting a populist fiscal approach. Corporation tax and capital gains tax rates have been slashed at a time when UK plc is in more debt than ever before. Income tax rates have been reduced and personal allowances increased. Only National Insurance and VAT have been kept at previous levels. If all parties refuse to tax individuals and companies directly there is then less reward for saving tax efficiently over the long term. The reduction in lifetime allowances and annual allowances also creates uncertainty as does the threat of removing tax relief on pension contributions. I find it disturbing and disappointing that we live in a society where greed and short term profit is promoted by the government at the expense of long term security. But then what else can we expect from the most self-serving Chancellor we have seen? A clever but truly odious man.

  2. Ian Neale says:

    The fundamental cause is the irresponsibility of politicians whose horizon is the next election and who accept no responsibility for any effect of their actions beyond that date. In my opinion, this is not sustainable: neither economically nor societally. As pensions professionals we are more aware than most citizens of this, so we should be saying so loud and clear.

Leave a Reply