Alan Rubenstein, a BZWIM director, claims that a pension tax would tip some pension funds into deficit and force many companies to resume contributions. 'The effects on pension funds, their members and on companies could be little short of disastrous.'
Before the last Budget, pension funds were allowed to reclaim the full 25 per cent tax credit on payments of dividends by UK companies. The rate was reduced by Norman Lamont to 20 per cent, and there is concern that Kenneth Clarke may be tempted to abolish the right to reclaim a tax credit.
There was little public outcry at Mr Lamont's move, and while the Government is struggling to find ways of restraining its pounds 50bn annual borrowing requirement, investment funds have had an extremely buoyant year. The Institute of Fiscal Studies has calculated that a move to eliminate the tax credit would raise an extra pounds 3bn of revenue for the Government.
Mr Rubenstein calculates that ending the tax credit would knock 10 per cent off share price values because pension fund gross incomes would be reduced. The fall in shares would aggravate the effect on pension fund finances of lower incomes. In turn, this could lead many companies to abandon the use of final salary pension schemes, and the open-ended commitment to its members this implies, in favour of defined contribution schemes.Reuse content