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Osborne's pensions reform: reckless politicking or financial masterstroke? (credit: Getty Images)

For much of the early 21st century the Conservative Party would have two retorts ready for anybody who dared call for more economic radicalism. The first was that nobody was interested in the economy. The Cameron team argued that the Eighties were the decade when economics was in the ascendency whereas, after the Thatcher reforms, people were interested in "happiness", polar bears and quality of life issues. Cameron himself has never shown much interest in economics. The second point the Conservatives would make was that nobody was interested in radicalism. "Softly, softly, catchee monkey" was the approach as the Tories tried to "decontaminate" their brand.

But this year's Budget included a radical economic measure that seems to have been popular. Perhaps this should send a message to the high command that they have been following the wrong course for nine years.

The measure in question relates to how people are allowed to handle their pension savings. It is proposed to allow individuals to spend their pension savings as they wish as soon as they are ten years away from the state pension age. If they spend it on a Lamborghini, that will be it — they should not expect anything more than the state pension.

It is rather unusual to see a budget measure that involves a considerable amount of tax simplification. Since Nigel Lawson stepped aside as Chancellor of the Exchequer in 1989, the tax code has become more and more complex. It now stands several feet high at 11,000 pages or more. The pensions measures announced in the Budget do involve considerable simplification. The state will no longer require most individuals to take 75 per cent of their pension pot as an annuity; the complex rules designed to regulate those with larger pension pots who were given the opportunity to avoid or delay an annuity purchase can be binned; the special tax rate of 55 per cent for dipping into the pension pot will go.

This measure is the logical extension of an idea that was first discussed by Conservative shadow ministers when they were in radical mode during the 1997-2001 parliament and which was followed up in the Institute of Economic Affairs (where I am editorial and programme director) publication, The Way Out of the Pensions Quagmire, in 2005. Annuitisation should only be required to the extent that it keeps pensioners from claiming means-tested benefits from the state. The government had already begun to adopt this principle in some limited liberalisations. Now that the government proposes — mistakenly in my view —to provide a state pension above subsistence levels, the rationale for annuitisation requirements disappears altogether.

One potential beneficial side-effect of the measure is that people may use the increased flexibility to put some money aside for long-term care and health costs (especially if they are in poor health and annuities are not good value). People may also use their pension pot to purchase special types of annuity appropriate for long-term care and disability provision or to make adaptations to their home. Lots of things that were not possible may now become so.

There are two problems with the measure which the government may wish to address. The first is real but could easily be put right with a further radical policy change — though one which would be unpopular. The other isn't really a problem, but will likely be perceived as one.

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