19 March 2014
An ILC-UK policy briefing looking at the 2014 Budget and OBR forecasts
This note analyses today’s Budget and OBR forecasts from an ILC-UK perspective. This means that we focus primarily on measures that are likely to impact on, or address the challenges of, an ageing population. This note is not therefore just concerned with how policy will impact older people but also the extent to which policy is equitable across generations and whether the chosen measures are likely to be effective in addressing the economic and social challenges of demographic change.
The Budget statement
- According to the Chancellor, Budget 2014 was a Budget for “makers” “doers” and “savers”.
- Of particular interest from an ILC-UK perspective were the announcements impacting those at the point of retirement – including abolishing the requirement to annuitise altogether. People with small and large pots will be able to take-up drawdown products, annuitise or take their pension as a lump sum.
- We think that while removing ‘the effective requirement’ to take out an annuity will help some by providing additional flexibility, for many others, annuities help to reduce the risk of living in poverty towards the end of life. It is therefore critical that those at retirement are able to access advice in order to make an informed decision.
- The Budget also included measures to help older savers through a new savings bond for the over 65s, by increasing the limits on ISAs to £15,000 and by abolishing tax on small savings income.
- These measures – and particularly the older peoples’ savings bond were suggestive of the fact that this was a budget for the Grey Vote. We think it would be fairer if the bond was available to all age groups and not just those over 65.
- Nevertheless, many of the reforms to savings are positive steps in the right direction, which should help to increase the number of people putting something away at the end of the month. Yet these measures will only go so far given continuing economic pressures.
The OBR’s Economic Forecasts
- Despite economic growth for 2014 and 2015 being revised upwards, the UK’s level of economic output will remain far below that implied by the long-term trend rate of growth.
- Future growth is forecast to be primarily driven by increasing private consumption with question marks remaining about prospects for investment-led growth and with net trade (exports-imports) still negative.
- Consumption is likely to be driven by rising household liabilities with the OBR revising upwards the pace at which liabilities will rise over the coming years. But incomes will not rise as fast which is likely to mean an erosion of savings.
- The OBR has also revised up its forecast for the pace at which house prices will grow to 2016. Part of this growth is the consequence of Help to Buy. Strong house price growth is likely to cause problems with affordability – both for those looking to buy as well as those renting.
- The combination of consumption led growth fueled by rising household liabilities and continued house price growth putting pressure on affordability will continue to put pressure on the Bank of England to maintain loose monetary policy.