Anger over cuts in pension subsidies

The Government was yesterday attacked for slashing subsidies for company pension schemes in a move that could cut the retirement incomes of tens of thousands of members by up to 30 per cent. As Andrew Verity reports, the decision is predicted to kill off thousands of money purchase pensions run by small employers.

John Denham, the DSS pensions minister, announced cuts to pension rebates, the subsidies given to people who give up Serps, the State earnings related pensions scheme, when they join a private scheme.

Hundreds of thousands of members of money purchase schemes, which include large companies such as WH Smith, previously received a minimum rebate from the taxman worth 3.1 per cent of their salary. From next April, these rebates will be slashed by 0.9 points to 2.2 per cent.

For every pounds 100 of subsidised pension which a young member could previously expect, he or she can now expect just pounds 71, according to figures from Scottish Equitable, the life insurer. Older members will also see the subsidised pension cut by at least 11 per cent.

The decision will anger a pensions industry already smarting from the July decision to abolish the dividend tax credit paid to pension schemes, which was expected to lower pension benefits by at least 10 per cent.

Bill Birmingham, benefits official at the National Association of Pension Funds, said: "This will hit members, who will effectively now have a lower pension. A drop of 0.9 per cent will mean 9 per cent less income in retirement." The cuts have astonished pension experts because they are accompanied by a sharp hike in subsidies for personal pensions, repeatedly criticised by the Government as expensive.

Personal pensions will receive a rise in rebate of 0.4 points to 3.8 per cent - giving personal pension holders 72 per cent more than members of group schemes. The cost to the Treasury is approximately pounds 160m a year, based on DSS figures.

Members of final salary schemes will receive the same rebate as before, despite criticism following the Budget that this was too little.