Guest blog: the Budget was a not-so-secret tax cut for the baby boomer generation

27th March 2014

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Neil Lovatt, director at Scottish Friendly gives his opinion of the Budget proposals and why it should worry the slightly younger generations.

I’ve got form having a go at the Baby Boomer generation, the rock and roll generation that wanted to live fast and die young. Where the Baby boomer generation has gone chaos has tended to follow. They caused booms and bubbles in nappies, schools, housing and arguably the recent stock market booms and busts.

But this. Well this takes the biscuit. In fact this takes the biscuit, the tin, the cupboard that the biscuits were kept in and a substantial proportion of the kitchen.

I’m talking about the recent pension reform announced in the budget this week. George Osborne has freed us all from the requirement to buy an annuity. Let the cry of freedom be heard loud and proud…. Err except no one actually needed to buy an annuity before the budget.

The real change was actually a not so secret tax cut and a dog whistle bribe to the Baby Boomer generation to dump on everyone else.

But why should someone like me stand in the way of a pensioner having access to “their own” money? Let’s be clear I’m not standing in anyone’s way and I would have made it much harder for anyone to drift into an annuity and made capped drawdown much easier to access.

I just think that we should be playing by the rules we’ve all signed up to.

For anyone currently approaching retirement their pension pot is made up of two sources of income: that of their own money, possibly some from their employers, and also a substantial proportion from the government in tax relief.

That state contribution in the form of very generous tax benefits is paid for by all of us, that is the Baby Boomers, Generation X and Generation Y. That payment was part of a grand generational bargain. GX & Y supplement Baby Boomer’s pensions so long as they lock away their money for the future and won’t financially rely on their children in retirement.

That bargain was bust wide open this week in the search for cheap headlines. Generation X & Y face the prospect of paying twice for their parents.

Not only are GX & Y helping to fund the Baby Boomers pension pots they are now going to support some of them in old age through the benefits system!

Why? Well give the self styled “most selfish generation in history” a big bag of cash guess what at least some of them are going to do? Spend, spend, spend it until they’ve got nothing left.

And when the cupboard is bare no one is anyone going to say “you’re on your own” whilst passing over directions to the local food bank.

Make no mistake about it this policy is going to increase the social security bill and it’s going to be paid by, yes, you guessed it Generation X and Y.

So the generational bargain is now pay twice, pay now and pay in the future and like it.

Sadly no one seems to have noticed. Why should they, we’ll not be paying the bill for a few years, in the meantime we’ll get an artificial consumer and property boom by switching long term investment assets to consumer spending. Who cares about the future after all as the Who said “hope I die before I get old”.

The information provided in this article was accurate at the time of publishing and should be read in the context of the date it was published. Views in this article are those of the author alone and do not necessarily represent the view of Scottish Friendly.

Neil Lovatt blogs at the Scottish Friendly community blogsite

14 thoughts on “Guest blog: the Budget was a not-so-secret tax cut for the baby boomer generation”

  1. David Lilley says:

    Neil,
    I must disagree with the whole of your worries. But first I must dispel the myth of the “lucky baby boomers”.
    I first read an article in the Times by a female journalist about five years ago that gave birth to the myth of the lucky baby boomers. They had had a big party, driven gas guzzlers, seen their house values soar and left us with global warming. The myth has gathered momentum with the introduction of tuition fees and young people unable to get on the housing ladder. But the facts are unchanged. If you were a baby boomer every stage of your life was more difficult because there was more competition for an eduction, an apprenticeship, a job or a pension.
    The baby boomers only started to benefit from house price inflation following demutualistion (before this house price inflation was limited to mortgage availability which had to be matched by savings deposits at the BS). Ridiculous house prices only came after 2001 when interest rates fell to 3.5% following the dot.com burst. The baby boomers were paying less for their houses but the interest rates they were paying were much higher (14% base rate in 1991 for example).
    The baby boomers weren’t getting massive state subsidies for their private pensions. Private pensions only took off in the late 80s because you lost much of your company pension if you left an employer within five years. The tax relief was only the return of your tax if, and only if, you undertook to be less reliant on the state in your old age. In the late 80s it was expected that the universal state pension would disappear within 15 years and only be “targetted” at those who needed it.
    I might also point out that the elimination of the forced annuity route was in the Conservative manifesto of 2010 so it should have been no surprise.
    Also, if a few decide to get a Ferrari or spend, spend, spend, they cannot come crawling to the state for handouts because the means tested state pension has been replaced by the universal state pension. They will have to rely on this fixed pension, currently £140 per week.
    With all respect,
    David Lilley

    1. Noo 2 Economics says:

      David, once again whilst I find myself in broad agreement with your thoughts I simply must correct some of the many misconceptions you have mentioned in this piece.

      First, and this is aimed at Neil, most pensioners won’t spend, spend spend because they saved saved saved in the first place when they were not compelled to (as they all will be by 2018 due to workplace pensions). They are hardly going to have a personality transplant overnight!!

      ” The baby boomers only started to benefit from house price inflation
      following demutualistion (before this house price inflation was limited
      to mortgage availability which had to be matched by savings deposits at
      the BS)”

      If I remember correctly demutualisation began in the late 80’s so howe do you explain this http://www.whatprice.co.uk/financial/housing-market/house-prices.html ? You will see that he first real big upsurge in house prices was in the early 70’s followed by a fall (as the recession made it’s presence felt) them a rocky ride followed by a steady climb commencing in the early 80’s (as inflation of circa 20% eased) followed by a softening in the early 90’s (just after demutualisation started?? and the economy collapsed) followed by a steady climb fromthe late 90’s onwards (as money became cheap and liar mortgages went viral).

      “The baby boomers were paying less for their houses but the interest
      rates they were paying were much higher (14% base rate in 1991 for
      example)”

      Yes I was one of them!! Bought in September 1987 at 7.5% and watched my monthly payment almost double in 2 years!!! Almost lost the house, so I can agree with you on that.

      “Private pensions only took off in the late 80s because you lost much of
      your company pension if you left an employer within five years”

      As this sentence stands it implies that your pension was lost but this was not the case. You had a choice, either cash it in and walk away with the cash in your pocket or freeze it and collect it when you reached scheme pension age or commute it to another pension scheme you paid into later. If you had more than 5 years contributions you lost the option to cash in the pension but it certainly wasn’t lost.

      “…they cannot come crawling to the state for handouts because the means
      tested state pension has been replaced by the universal state pension”

      No it hasn’t, nor are there, currently, any plans to replace the means tested state pension known as Pension Credit. Pension Credit remains as an addon to existing pensioner’s income if they meet certain (lack of) income and savings conditions.

      It is intended in the future that the amount of the basic pension will exceed the maximum pension Credit you may receive and so Pension Credit will become obsolete, so they won’t have to come crawling because they’ll already be receiving an amount at least equal to pension Credit without any means testing taking place (as is the case now). Unfortunately that intention is based on the assumption that every one will have either worked in the UK or successfully claimed benefits resulting in class 1 NI contributions being credited to their NI account for at least 35 years.

      This naive assumption takes no account of later in life immigrants who work a short while and then retire in the UK, nor of people who choose not to claim benefit (whether because they are working in the black economy or because they have other private income) who suddenly appear at retirement age requesting a pension.

      Furthermore, there have been no papers circulating as to how the “new” pension is to be calculated when it is introduced in 2016 – which isn’t far off!! I don’t see the Government suddenly upgrading every retiree’s pension to £144 per week (adjusted upwards for inflation of course) in 2 years time. If they do intend this sudden upgrade from £110 to £144 per week resulting in an extra £1.5 billion per year to be found for state retirement pension funding exactly how do they intend to finance it?!!

      1. David Lilley says:

        Dear Noo,

        It is excellent that you read my comments and make sound returns.

        I looked at the site you referenced but their house price graph only went as far as 2005. They claimed that house prices had risen 12,000% since the 60s. They obviously had their decimal point wrong. They claimed that they had risen in real terms by 4x since the 60s. That’s more like it.

        The house price boom in the early 70s is an annomally and they proceeded to gain nothing in the following eight years. Might have been down to 25% inflation around that time.

        Demutualisation allowed building societies to behave like banks with fractional reserve lending such that they could lend 11, 15, 19 times saver deposits and the cap on house price inflation, the “mortgage drought”, stopped happening.

        You did take a hit on your company pension if you left the company early. I transferred to my new employer but lost the tax relief element for example. As a result of the early exit penlties our servants encouraged personal pensions that were mobile and better suited to a more mobile workforce. I was one of four out of a workforce of 70 who remained in the company scheme because I appreiciated the company contribution. As it happened the company took three years of “holidays” because the fund was able to meet its liabilities.

        You seem to know much of the universal pension but sometimes the devil is not in the detail but in the big picture.

        Who could possibly understand why our servants were talking about a step change in the state pension to £140 in 2010 when we had an ageing population and, but for QE, we were bankrupt? The answer is for the sake of faireness. Pension credits and means-testing were giving the wrong cultural message; don’t pay into the system and you will be OK as you will get pension credit, do pay into the system and you will loose out due to means testing. The flat rate was also paving the way for the abolition of forced annuities which was already signalled in the 2010 Conservtive manifesto.

        You may remember William Hauge attacking the “great pensions robbery” and Patience Wheatcroft banging on about it for the next 13 years. The abolition of pensions tax credit in 1997 was a stealth tax that took £15b pa from pensions, destroyed final salary pension schemes and reduced investment in UK business by a grand total of some £200b to-date. Of course our servants post 2010 were going to make some correction and this is the big picture I mentioned above.

        The abolition of forced annuities has a second big picture impact as it mitigates future borrowing by a wreckless government as they would no longer have a captive audience of guilt buyers.

        When our servants (their full title is “our servants doing our bidding”) introduce the flat rate pension it will only be for new pensioners. There will be a two tier system.

        With all respect,

        David Lilley

        1. Noo 2 Economics says:

          Hallo David, thank you for your reply.
          I take your point about 12000%!! but…

          Demutualisation was made legally
          possible in 1986 but the first (Abbey National) was de mutualised in 1989/90. I bought my house in 1987 and by 1990 (the time that the very first building societies were demutualising) it’s value had increased
          70% so demutualisation had nothing to do with the surge in house prices. I believe it was the artificial restriction of MIRAS on mortgages
          to 1 person’s income that created a stampede of new buyers (in multiple partnership to maximise the old MIRAS benefit on houses in multiple ownership before it was withdrawn) in the late 80’s.

          Thanks for the clarification about
          company pension (defined benefit scheme?) but the hit you’re talking about was one that the usually defined benefit pension provider
          decided to apply via the equivalent of a market value adjustment (they could call it what they wanted but it boiled down to the same
          thing) in the case of a provider who was performing poorly. In your case it sounds like the new defined benefit pension provider was
          refusing to allow a transfer in of benefits from the old scheme employees were enrolled in, to it’s new(new in that the employees had
          just joined) scheme. If you lost tax benefit it sounds like an error was made between the pension providers in that rather than
          transferring ownership of holdings they converted them to cash, transferred the cash from one pension provider to the other and then re – invested. In so doing this would trigger a chargeable event. Unfortunately, current private pension providers can and do apply market value adjusters when you try to transfer or cash in your pension so private pensions achieved nothing other than increasing uncertainty. Ask yourself this: If private pensions are so good why
          did the Government feel the need to introduce auto enrolment (compulsion)?

          “Pension credits and means-testing were giving the wrong cultural message;
          don’t pay into the system and you will be OK as you will get pension credit, do pay into the system and you will loose out due to
          means testing. The flat rate was also paving the way for the abolition of forced annuities which was already signalled in the 2010
          Conservtive manifesto”

          Currently, if you pay into the system for at least 30 years (due to increase to 35 years in a few days time) you will receive a full state
          retirement pension. If you have insufficient additional income to increase your total income to £142.70 if you’re single, or £217.90
          if living with a partner, your income will be topped up to the relevant level via Pension Credit. I fail to see how you’re being penalised if you already have this level of income given it is considered to be an existence level of income?? Unless you are worried that people are getting the extra money over the state retirement pension for “nothing”? I don’t see it that way as it’s an existence income not a living income.

          I think the real reason behind the pension increase, is that the UK has the lowest level of state retirement pension in the developed
          world, so in that sense I accept your “fairness” argument but still wonder how they will finance it. I suspect a rude awakening as
          the time nears where we will see many complex formulae being applied
          according to when you started paying NI conts with the general rule being something along the lines of those who just started paying NI
          conts in the last 5 years will get the full £144 pw (apportioned according to their conts) when they retire but those who have been
          paying NI conts prior to that will have their pension calculated under the “old”( current) formula with any conts made since about
          2010 being counted towards pension in the “new” formula. The net result, if I am right will be retirees in 2016 being very marginally better off whilst each new year of retirees thereafter will be incrementally better off. This will save a fortune in increased pension benefits payments in the early years but shoots down in flames your “fairness” argument. This is why I believe Pension
          credit will still be around for a long time yet, moreover, Pension Credit will have to come to the rescue of those who have not worked
          much and failed to claim unemployment benefit, these types of people will always be around. Remember there are currently no plans to abolish Pension Credit in 2016, it will simply be gradually negated for the majority of people in the years to come if my analysis is
          correct. We will know if I am correct in a little under 2 years time. I know you think that the 2 tier system will consist of existing pensioners on the “old” (current) system with new pensioners claiming for the first time in 2016 being on the “new” £144 pw system but I think you and many others are in for a shock
          and surprise.

          Whilst I never agreed with the abolition of the pensions tax credit the abolition of forced annuities does nothing to put that right.
          Your draw down will all be taxable whereas the annuity was not although the income it produced was. A second order effect of this
          new move will be that if you choose drawdown rather than annuity purchase, the remaining sum will form part of your estate upon your
          death thereby boosting the value of your estate possibly beyond the now frozen £325000/£650000 threshold all of which will of course help towards reducing future borrowing as tax revenues swell unless
          individuals plan their tax affairs very carefully (most won’t), so I wouldn’t get too excited about “fairness”.

          I don’t do partisan politics as they are all a waste of space in my view, but I note that the current shower have done nothing to reverse the abolition of pensions tax credit the previous shower introduced.

          1. David Lilley says:

            Noo,
            Thank you for the time and effort you have put into this reply. It will not be wasted as I will read it over and over until I fully understand it.
            You obviously know this subject better than me.

  2. Neil Lovatt says:

    David & Noo,

    Thank you greatly for your comments. I won’t go into great detail on the Baby Boomer issue right now, as I’ve posted on it elsewhere and would recommend David Willet’s The Pinch as a good source of information. Indeed David I was writing about this subject about 15 years ago, so the myth you describe has been going for much longer than the Times article.

    For now I would just point out that the Baby Boomer generation are highly likely to be the first in modern history to see their children in a worse economic position than their own. That is telling and arises from the unique circumstances of origins.

    What I would like to underline however is my concern about the Baby Boomers spending their money. I fully understand the theory of why should someone who has saved for their retirement suddenly change the habit of a lifetime and become reckless with their finances (Noo’s personality transplant).

    But this misses several issues.

    Many pensioners may well not have saved all their lives, just lethargically, contracting out, through employer contributions and the odd period of actual payments. No matter what this will have been significantly funded by the taxpayer.

    Those pensioners that have contributed all their lives may well, acting perfectly sensibly, still run out of money as individuals are notoriously poor at estimating their own mortality. In the US some studies are showing 30% of pensioners are already running out of money.

    Some, and very possibly a few, will blow all of their money (or pass it off to their family) and live off the state.

    Now the single tier pension is supposed to be the panacea to protect the taxpayers from the pain of paying twice; firstly through tax relief into pensions and secondly through means tested benefits if their pension income runs out. The single tier pension will mean that everyone remains above the means tested benefits level.

    The trouble is that many people, indeed many people sitting on fully taxpayer funded pension pots through contracting out, will not qualify for the single tier pension.

    The level of protection offered by the single tier pension to the taxpayer is great in theory but porous in practice. I’ve covered this, with a few biblical references, in a recent google+ blog

    https://plus.google.com/107490861314832647819/posts/HKntNDeznk3

    However this does point to a solution that can adequately protect the taxpayer. Simply make having a full entitlement to the single tier pension a precondition to have full and complete access to a pension fund. I’ll be posting something to that effect shortly!

    1. Noo 2 Economics says:

      I am very grateful for your reply Neil – thank you. I didn’t realise that my contracted out defined benefit final salary pension would be counted as part of the “single tier pension” and you betcha I’m hopping mad about it as I planned on receiving my State Retirement pension in addition to my occupational pension although I can see where they are coming from.

      I was one of those “lethargically, contracting out, through employer contributions and the odd period of actual payments” because when I got to a position where I could commence a personal pension, I had already witnessed numerous regulatory changes to pensions usually for the worst.

      To my mind a pension savings plan should be taken out for at least 30 years and ideally 40 which requires regulatory stability during that time. This was not and is not the case, I recognised a dead duck, opting instead for an ISA (even though it has the disadvantage of no tax relief on contributions) as ISA’s had enjoyed relatively little regulatory interference since their inception as PEP’s in the 80’s and what changes there had generally been for the better.

      Moreover, in the case of a Personal pension you also had/have little control over the asset allocation of your pension pot unless you had a SIPP, which then introduced extra administration charges in addition to the normal ones applied to an ISA.

      Having said all that, this constitutes a major blow to my planning and I have to replan, because part of my financial planning relied on the receipt of a State pension regularly interfered with by fickle politicians.

      I would urge any one reading this to give serious consideration to the use of ISA’s as an alternative to a private/workplace pension despite their inferior tax treatment on contributions as:

      1. you will have much more control over asset placement,

      2. so far, ISA’s have suffered little negative regulatory interference – although there is no guarantee things will stay that way.

      3. you can cash in any amount, any time you like and all payments from the ISA are tax free (bearing in mind you need enough money to see you through the rest of your life)

      David, if you are reading this I guess from what you said these changes will affect you too!

      I look forward to reading your forthcoming post on single tier/private pension entitlements Neil as I already have questions and thoughts about that, but they can wait for another day.

      1. Neil Lovatt says:

        Thanks Noo.

        Don’t worry about not knowing about the single tier pension, few people do, the government tend to mumble the 35 years of contributions line, and hope most people won’t realise. I’ll be be surprise if there are many people who are actually entitled to the full single tier pension, which rather defeats the purpose (and certainly the rhetoric) of it.

        I have to say I’m with you on ISAs over pensions. Indeed I’ve published quite a lot about it in my time. It all boils down to a rather simple set of rules for me:

        If you are a higher rate taxpayer, use your pension, you’ll get higher rate relief on the way in and pay basic rate on the way out, it’s a licence to print money if you do it properly.

        On the other hand if you are a basic rate taxpayer then use your ISA allowance first and build up a tax free savings pot. If you ever become a higher rate taxpayer in later years you can tip it into your pension and capture that higher rate relief.

        If you never become a higher rate taxpayer then you can decide whether you want to invest in a pension at a later date, and a date much closer to your retirement. This will allow you to lock up your money at a time you can be at least a little more confident about the shape of pension policy when you retire. In other words I would rather lock up money for no more than 5 years rather than 30 years.

        My blog on the solution should be on thisismoney.co.uk tomorrow. However it’s not giving anything away that one of the most efficient solutions you could have would be to use your pension fund or tax free cash to repair your single tier pennon contributions as it’s an extremely efficient way to purchase a secured income for life, way cheaper than an annuity. Thereafter you can blow your money on anything for all I care as you’ll have sufficient income so I (and other taxpayers) won’t need to pay any pension credits.

  3. Noo 2 Economics says:

    Neil, following further research and a re – reading of your google post I think I misunderstood your post.

    For clarification, am I right in saying that when the single tier pension is introduced, any state pension already built up through National Insurance contributions (even at the reduced rate for contracted out schemes) will be protected and called a “foundation amount” payable upon reaching state pension age and that this amount could be even higher than the single tier pension if it was contributed to via State Earnings Related Pension Scheme/State second pension scheme?

    1. Neil Lovatt says:

      http://www.thisismoney.co.uk/money/comment/article-2596919/ED-MONK-A-simple-solution-pension-reform.html?offset=0&max=100&reply=51722243#comment-51722243

      https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/181237/single-tier-pension-fact-sheet.pdf

      https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/181237/single-tier-pension-fact-sheet.pdf

      Noo – as I understand it you could get more if you have more than 35 years. The DWP pdf confirms this. Remember though that contracted out years don’t count towards your foundation amount as if you didn’t pay any NI in those years,

      From the pdf:
      I am a member of a contracted-out scheme. Will I receive £144 per week if I already have 35 qualifying years?

      • If you have previously been contracted out of the additional State Pension, a deduction will be applied when we calculate your foundation amount. This reflects the fact that, whilst you were contracted out, you paid lower National Insurance contributions and your employer received a National Insurance rebate to fund your workplace pension. Therefore, you could have 35 qualifying years and not receive £144 per week.

      • The deduction is broadly equivalent in value to the workplace pension the rebate funded. This is consistent with the rules of the existing pension system.

      1. Noo 2 Economics says:

        This has been the most informative exchange I have ever had on any forum. Thank you very much Neil. I note that the DWP “Single Tier Fact Sheet” is suitably vague on the amount of “deduction” to be applied to the foundation amount calculated other than:

        “The deduction is broadly equivalent in value to the workplace pension the rebate funded. This is consistent with the rules of the existing pension system”

        The implication here is that the whole amount of your contracted out occupational/work place pension will be deducted from the foundation amount and if the result is that you are left with total income of less than £144 per week you are topped up to that amount but if you have total income of more than £144 per week you get nothing!!!

        This is completely morally wrong. Whilst the contracted out employee paid less National Insurance Contributions (NI Conts) the reduction only related to the amount you were not contributing to the additional state pension, not the entire State Retirement Pension which you were still contributing to with the rest of oiur NI Conts. So, it is in no way “consistent with the rules of the existing pension system”. If this is the case then all contracted out employees should demand refunds of that part of their NI Conts relating to the State Retirement Pension.

        The fair way would be to divide the “old” current weekly State Retirement Pension by 35 just before the single tier pension is introduced and the foundation amount would simply be the weekly amount (calculated in relation to State Retirement Pension) multiplied by the number of years the employee made contributions, with an additional amount to be calculated under single tier rules in respect of contributions made from 2016 onwards. The calculation of the foundation amount for those contracted in to additional State Pension could remain as it is. This would be simple, transparent and fair.

        Now I have the full understanding I only see 2 “differences” between the current system and the transitional single tier. Under the, er, “new” system people with insufficient contributions will be made up to the single tier rate via Pension credit as they are now!

        The first “difference” is that people who have been paying into a contracted out occupational pension will have the income from their occupational pension counted towards their single tier pension and if their occupational pension equals or exceeds the single tier pension they get nothing – which sounds suspiciously like the “means testing” that Osborne said he was getting rid of. So it’s a difference (for the worst if you’ve been a saver and contributing to a contracted out pension – what was that about “a budget for savers”?!) but it’s not a difference!!

        The second “difference” is that people can access their pension pots any time they want after age 55 without buying an annuity, but then, you could access your pension pot without buying an annuity since 2011, so another pseudo difference.

        Neil, you say this has simplified Pension rules, I see nothing simple about a formula which remains vague and unexplained in areas, but this underlines my point about Pensions being a waste of time because of all the negative interference run by successive Governments.

        I foresee a further change in the next 20 years or so whereby the workplace pension that people are being coerced into will be counted towards your entitlement to the single tier pension (also known as means testing that Osborne reckons he’s getting rid of!!), as it looks like they’ve already introduced that means test to contracted out employees under the transitional arrangements. But remember Osborne is ending means testing, we know this because he said so!!!

        You argue that under the “new” scheme people can withdraw all their pension savings and spend/give away the lot and then demand their full single tier pension, but that has been the case since 2011 has it not? It’s just called “Pension Credit” not “Single Tier”.

        There is little change here except those in contracted out schemes look likely to be ripped off for the reasons rehearsed above and the Government and Financial Services industry wonder why no one trusts them!! Beam me up Scotty.

        1. Neil Lovatt says:

          Noo,

          From what I can work out your analysis is correct, but I do think you can get more if you have more than 35 qualifying years.

          Remember though if you were contracted out you will have a pension pot that is substantially inflated by the taxpayer through contracting out and you could use that to purchase your missing years for your single tier pension. It’s certainly good value compared to an annuity!

  4. AW1983 says:

    I’m someone who will happily point them to the nearest home shelter and food bank. I’m in my thirties, degree and professionally educated, worked for eleven years so far, never been extravagant, earn what the government claims is a ‘high’ income and have nothing to show for it because I’m screwed by high rents and can’t afford to buy. My sympathy is already threadbare and give it another twenty years and the only cash they’ll get out of me is a one way ticket to Switzerland.

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