Experts predict widespread underfunding for retirement. Martin Slack, of actuaries Lane Clark & Peacock, said the move broke "the fundamental trust" between the Government and the public on which pension provision had been based. Actuaries calculate that a male of 35 expecting to retire at 65 and contributing 10 per cent of his pounds 30,000 salary could, until Wednesday's speech, have expected a pension of pounds 44,259 a year. But the loss of the tax credit could reduce that to pounds 39,036 - a 12-per-cent reduction.
The problem stems from Gordon Brown's ending of what has been seen as a perk for a handful of City institutions. But it is not that simple. The tax credit on dividends that results from a facet of corporate taxation known as Advance Corporation Tax (ACT) might look like a target whose only victims are pension funds, which are not only faceless but also do not have a vote. But recent lobbying demonstrated that the potential ramifications go beyond the Square Mile.
ACT is a by-product of the system introduced in 1973 to try to reduce double taxation and is triggered when a corporation pays a dividend. The company pays shareholders a dividend net of the basic rate of income tax - 20 per cent - and pays the tax direct to the Inland Revenue on behalf of the shareholders.
But the real beneficiaries are those that do not pay tax - mostly tax- exempt institutions, such as pension funds, which account for 50 to 60 per cent of UK share ownership. They can reclaim the ACT paid by corporations on their behalf and receive substantial extra income in the form of gross dividends.
It has long been assumed that this extra "incentive" for City institutions to receive dividends has accounted for the British disease of short-termism by diverting funds away from investment in research and development and related areas.
But many accountants argue that even with the cut in corporation tax the effect of the change will be to reduce investment because corporate cashflow will be hit by having to pay more to institutions to persuade them not to invest elsewhere or into their pension funds.
The approximately 6 million people in personal-pension schemes will have to make up the shortfall by making additional contributions of 1.5 per cent to 2 per cent of their salaries. However, many - particularly the self-employed - will already be making their maximum contributions and must therefore face reduced benefits. What happens to the 4 million- odd people in occupational plans will depend on whether their employers have final-salary or defined-contribution schemes. Companies with final- salary schemes are obliged to make up the difference, but a company can change the basis of its pension scheme or even wind it up at will.
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