Sunday Post – pensions and the budget: another missed opportunity
by Dr. Ros Altmann
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Another Budget – another wasted opportunity. After the dreadful damage inflicted on pensioners and pension funds by the economic meltdown, we might have hoped that the Chancellor would take this opportunity to address these problems. Forget it!
The Government does not seem to recognise the urgency. We all know that measures are desperately needed, but what did the Budget do to help our pensions crisis? Nothing. Indeed, if anything, it has made things worse by launching another tax raid on pensions!
The Chancellor talked of being guided by the principles of ‘fairness’ and ‘opportunity’. He pointed out the unfairness of giving one quarter of the £30billion spent each year on tax incentives for pension savings to the wealthiest 1½ %. His answer, however, was to remove the top rate tax relief on pension contributions of anyone earning over £150,000. How does that help the pensions shortfall?
This is nothing to do with ‘fairness’. It’s all about raising revenue to plug the gigantic black hole in public finances resulting from the Government’s fiscal incompetence. If it was really about fairness, the Chancellor would have redistributed the money taken away from top earners’ pensions to help improve everyone else’s pensions. But he didn’t.
In reality, the measure was, however, guided by ‘opportunity’. He spotted the opportunity to take more money away from pensions and he grabbed it!
Of course, this isn’t a one-off. One of Gordon Brown’s first acts when he was Chancellor, back in 1997, was to take away dividend tax relief from our generous final salary pension schemes. Most estimates suggest this decision has drained over £100billion from what was once considered to be the best-financed pension system in Europe.
And this has hit the pensions of millions of ordinary workers. Over the past ten years, nearly all UK final salary schemes have closed. This latest move to take tax relief from the highest earners poses further risks to private pensions. It will potentially mean company bosses losing interest in pensions, so they will be less enthusiastic about providing for their workers. If the Chancellor had put the money back into these funds, then I could accept the logic, but to just take more money away from pensions does not solve anything.
But of course the crisis isn’t just about pension funds. It’s also about pensioners themselves, so let’s look at what the Budget has done to address their plight.
The Chancellor told us that falling interest rates and inflation mean our ‘incomes go further’. As far as pensioners are concerned, that is utter nonsense. It shows just how hopelessly out of touch he is.
Millions of pensioners trying to live on income from their savings (having been prudent enough to set money aside for their future) have seen Bank of England rate cuts wipe out much of their income. And pensioners are not even benefiting from falling inflation either. The Institute for Fiscal Studies has calculated that the prices of typical goods that most pensioners spend their money on (like food, energy or council tax, rather than mortgage interest or ipods) are rising by over 6% a year.
Against this background, offering a 2½% rise in the state pension next year is better than nothing, but hardly addresses the scale of the problems pensioners face. Borrowers and banks were offered lifelines immediately, pensioners are expected to wait.
The reforms to pension credit will give half a million poorer pensioners an extra £4 a week to make up for some of their lost savings income. This is welcome, but payments will not start until November this year – and they offer no help on savings of over £10,000. Pensioners lost their savings income last year, they have been struggling to survive and some will not even live until November. The required sense of urgency is totally lacking.
The bottom line is that the pensions crisis could ultimately be even more damaging for our economy than the credit crisis. Raiding pension funds, without putting anything back, is a recipe for economic decline, especially in our rapidly ageing population. We are already putting too little aside for retirement. The Budget offered no new measures to encourage anyone to put more money into a pension, nothing to help companies struggling with their pension deficits and nothing to help those who are forced to convert their pension funds into annuities at possibly the worst time in history.
No longer can we dream of a comfortable old age. With the decline of employer pension provision, a meagre state pension and dwindling savings incentives, it is clear that the Government has not woken up to the serious damage done to pensions during this crisis.
Could this be because almost nobody in our political establishment has a personal stake in ensuring a decent pension for the general public. Politicians and top civil servants will be the pensions aristocracy – with their generous, inflation-proof, recession-proof pensions, financed by the future taxpayers whose own retirement prospects have been so dangerously undermined by recent events. If the Chancellor is really concerned about fairness, surely this would be a good place to start.