Leading Article: A tax by any other name

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The Independent Online
Contrary to early reactions to last week's Budget, Gordon Brown has not squared the circle. He has not magicked revenue from nowhere. Specifically, he has not found the Treasury an extra pounds 5bn a year from pension funds without affecting the incomes of millions of households. But he has, a cynic might say, been very clever in choosing the complex area of pensions and tax to make his swoop. Few of us understand pensions, advance tax credits or corporation tax. It is doubly clever since pensions are the part of our financial arrangements that we prefer to ignore. Refusing to think further about such things, we might shrug and concede that the Chancellor did at least honour his pledge not to raise income tax.

The trouble is that, unlike a penny in the pound tax increase, the burden of the Chancellor's revenue raising has fallen unequally, almost randomly, on those with certain types of pension schemes. Worst affected are the seven million personal pension holders and up to two million members of company money-purchase schemes. And worst affected of these are the young and lower-paid. They do not enjoy higher-rate tax relief on their pension contributions, and they have more years in which to suffer from the shortfall created by the Chancellor's abolition of tax credits to pension funds.

The Treasury argues that there are billions of pounds sloshing around in pension funds and that the funds can withstand the loss of tax credits without passing on the effects to pensioners; that the current system has led to a bias against investment; and, witheringly, that "there is no question that in the long term and the medium term it will be good for companies and it will be good for pensioners". Saying it doesn't make it so, unfortunately. It is true that for those in large company schemes where a final pension is guaranteed (a dwindling proportion of the work- force), the funds or employers can absorb the loss. But the concept of a fund in surplus doesn't arise for those in individual schemes (both personal pensions or company money-purchase schemes). These are the new arrangements that have been urged on Britain's increasingly insecure work- force; indeed under the last government, urged even on those formerly in secure schemes. It is, we were told, the modern response to modern ways of working. There is no guaranteed final pension; there is no employer to pick up the tab. For those people, what they pay in is what they get out, plus whatever their contributions earn. Either they pay in more now (an average pounds 190 a year, the industry says) or they will, as a result of the tax credit changes, take out 15-20 per cent less when they retire.

The full consequences of the Government's selective raid may take time to emerge. Many in personal schemes will merely increase their contributions in order to stand still. They will, in effect, be the ones for whom the Chancellor broke his promise not to raise taxes. Some, unable to pay more, will accept a lower pension - up to 20 per cent lower on some industry estimates - when they retire. That is an enormous annual "tax" burden. The younger and lower-paid may shrug off the loss on the grounds that state benefits will, after all, provide for their old age. Others may consider pensions are no longer the best way to secure funds for retirement: thus an important plank of government philosophy - ensuring that everybody has a second-tier pension - will founder.

The Government has an opportunity to rethink. In the next few weeks it will launch a pension review, expected to air Labour's plans for "stakeholder" pensions. It will cover, among other things, the future of the State Earnings Related Pension Scheme. Since the mid-1980s government actuaries have been encouraging people to opt out of Serps. People in work have been given age-related bribes of up to 9 per cent of their salary to start the very schemes most affected by the Budget. The treasury did not, one assumes, pluck these sums out of the air. They would have been calculated on the basis of a set "real return". The Treasury should at least acknowledge that those amounts should now be increased to cover the Budget's effect. That will repair only a tiny bit of the damage. For the rest, the review must acknowledge that the burden of the 1997 Budget fell unfairly on millions of the very people this Government hoped to encourage to provide for their old age.

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