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As an unwelcome distraction from the Malaysian airliner mystery, George Osborne delivered his fifth Budget on March 19. For once, however, a Budget actually contained radical and innovative changes. The annual limit for an ISA, the UK's tax-exempt investment wrapper, will increase from £11,520 to £15,000, and you will be able to use this entirely for cash deposits instead of only half. More significantly, Osborne has abolished the obligation on retirees to use their pension funds to purchase an annuity, allowing them to access their accumulated capital directly.

This is indeed the biggest shake-up to pensions since the 1920s.  And lobbyists were quite correct that pensioners have been suffering. Because interest rates are low and people are living longer the annuity income from even a large pension pot has been derisory. Much better to permit pensioners to choose how to extract their money, and charge them standard income tax instead of the ridiculously punitive 55 per cent rate on "excessive" lump-sum payments bequeathed by Gordon Brown.

But — and you could sense there was a "but" coming — Osborne has missed a trick.

In 2011 I wrote a paper for the Social Affairs Unit called "The Price of Promises". Since the UK faces a demographic pensions crisis, and its citizens persistently under-save for their future, I advocated amalgamating the plethora of tax-favoured schemes into a single Retirement Investment Tax-exempt Account or RITA. Savers could contribute up to £48,000 per year, and employers could contribute a further £48,000, receiving tax relief at basic rate and tax exemption for the accumulated fund. They could withdraw up to £25,000 per annum free of tax and face no requirement to purchase an annuity. Unused funds would be exempt from inheritance tax on death, so that savers could share the proceeds of their thrift with their heirs. 

Rationalising the schemes on offer, and removing their complex restrictions, should lower management costs and hence boost returns.

Furthermore, if the official retirement age were raised to 70 by 2034, and the government made an initial seed contribution to each RITA, we could phase out the various forms of state pension as well (through a reassuringly complicated transitional process I outlined in the December 2012 issue of Standpoint) and avoid bankruptcy for the public finances.

The UK is stumbling into this solution by accident.  Since 2010 the annual limit on pension contributions has fallen to £40,000 from £255,000, and the annuity rule has now been abolished, while the ISA limit has gone up to £15,000 from £10,200, with cash and stocks-and-shares ISAs being amalgamated. The current government also intends to rationalise the state pension into a single payment at a flat rate and increase the age at which it can be drawn to 67 by 2028.

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