Dividend change may hit pensions

PEOPLE saving for retirement with personal pensions may have to increase their contributions in future to make up for the change in tax credits on share dividends as a result of a measure announced in the Budget.

Actuaries, advisers and pension fund managers were divided over the long term effect of the cut in tax credits from 25 to 20 per cent. Some thought that fund managers would be able to alter the mix of investments in pension funds to make up for the tax charge.

Paul Greenwood, research actuary at the benefit consultants William Mercer, said: 'You do not need to rush into it but next time you review your contributions you would need to bear this in mind.'

Company pension schemes will also be affected. Employers may be forced to top up schemes.

Some highly paid employees will be affected by the Chancellor's announcement of a freeze in the earnings 'cap' on pensions.

If the cap had been increased in line with inflation it would have risen to pounds 77,400. Advisers fear that if the Government continues to freeze it, many people now on middle-management salaries will eventually be caught.

Tax credit fears, page 24