Pensions figures overstated by £3bn a year

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The Independent Online

The Inland Revenue has finally conceded that it has been overstating the amount of tax relief paid on UK pension schemes by some £3bn a year since 1999, making a nonsense of the statistics on which it based new pensions legislation that is currently passing through parliament.

The inaccuracy of the pension figures, first highlighted by the Conservative Party more than two years ago, has until now been vigorously denied by the Revenue and the Office of National Statistics.

However, yesterday's climb-down confirmed suspicions that the ONS had been effectively double-counting a significant proportion of transferred pension contributions, which do not receive tax relief.

The revised figures mean the increase in pension contributions over the past five years has been significantly smaller than the Government has been boasting, confirming the fears of pensions campaigners that people are not saving enough for their retirement.

In the pensions Green Paper, published in December 2002, the Government said pension contributions had in real terms grown 40 per cent over the previous five years. But the recalculation means this growth has been about only 16 per cent.

Stephen Yeo, at Watson Wyatt, said the new figures illustrate the true effects of the Chancellor's decision to axe the dividend tax credit on pension funds in 1997. "This shows that the loss of the tax credit on dividends in 1997... has been a much more severe blow than previously assumed," he said. "It is two and a half years since the errors in the pensions statistics came to light. Since then we have had two major pieces of pensions legislation, both of which have been founded on incorrect data."

David Willetts, the Conservative pensions spokesman, said that if the overstatement in national insurance contributions is included, the Government has overstated the amount of pensions tax relief it has paid over the past five years by almost £20bn. "The value of tax relief and national insurance relief over the past five years now turns out to be £20bn lower than the Government used to claim. Against this background, the Chancellor's £5bn a year tax on pension funds looks more damaging."