Revealed: How Gordon Brown has cost you £100,000
The Chancellor's 1997 pension fund raid will have far greater consequences than previous calculations indicated, say specialists
It will reduce the value of the pension pot that typical employees could expect to save over their working lives by up to 13 per cent
Sunday, 8 April 2007
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Chancellor Gordon Brown's tax raid on pension funds is set to cost a typical worker in the UK over £100,000.
A joint investigation by The Independent on Sunday and BDO Stoy Hayward, the specialist accountancy and business advisory group, has revealed that Mr Brown's 1997 decision to tax dividends paid into pension funds will have far greater consequences than previously thought.
The £100,000 figure represents a reduction of up to 13 per cent in the value of the pension pot a typical employee who pays into a defined contribution scheme could expect to save over the course of their working life.
BDO Stoy Hayward used two examples in its investigation - a 25-year-old earning £20,000 in 1997 and a 35-year-old earning £50,000 in the same year. The accountants assumed that both would work uninterrupted until they retired aged 65, in 2037 and 2027 respectively.
In both cases BDO assumed that the pair's salaries would rise by 5 per cent per year and that they would pay 4 per cent of their wages into a pension fund. It was also assumed that the stock market would continue to rise in line with historic trends and that shares would pay a typical 3 per cent dividend yield. Bonds were expected to continue to pay an interest yield of around 4 per cent.
BDO Stoy Hayward calculated that, while the impact of Mr Brown's tax raid was relatively modest in its early years, by the time the employees were approaching retirement, the effect of the reduction in the compound dividend yield would very substantially reduce the amount in their funds.
In the case of the 25-year-old, the total fund available on retirement would be reduced from £920,000 to £800,000. The 35-year-old could expect to have a retirement fund of £980,000 compared with £1,080,000 had Mr Brown not made the tax change.
The accountants also concluded that the 25-year-old would receive £6,000 less in annual pension payments on retirement, while the 35-year-old would see his pension reduced by £5,000 per year.
Even taking into account future inflation of 2 per cent per year, the reduction in the size of the two pension funds would be £60,000 for the 25-year-old and £57,000 for the 35-year-old.
Prior to 1997, for every £80 of dividends received by a pension fund, a further rebate of £20 would be received by the fund from the Inland Revenue.
When Labour came to power in 1997, pension funds rarely showed a deficit and looked ripe for taxation.
Mr Brown is set to retire on a guaranteed pension of at least £100,000 a year, thanks to the generous final-salary pension scheme enjoyed by MPs.
Stephen Herring, tax partner at BDO Stoy Hayward, said: "Inevitably, any model must be dependent upon a number of reasonable assumptions. The assumptions used [by us] clearly demonstrate that the changes to the pensions tax rules introduced by the Chancellor could well lead to substantial reductions to the pensions that typical employees can expect to receive upon their retirement."
George Osborne, the shadow Chancellor, said: "These figures show that Gordon Brown's pensions raid is not some abstract problem confined to the pages of newspapers. It affects real people in very real ways. Now we know that his claim that it was the right thing to do for pensions ignores the facts.
"It's time he admitted that the pensioners of tomorrow will pay a high price for his mistakes."
Lord Oakeshott, the Liberal Democrat spokesman on pensions in the Lords, added: "These figures starkly show just how large a hole Gordon Brown has dug in the typical pension fund. It is a nonsense to suggest his tax changes have not done harm."
However, a spokesman for the Treasury said that the Government "did not recognise" BDO's figures, which did not take into account the boost in pension fund valuations that resulted from Mr Brown's decision in 1997 to reduce corporation tax from 33 per cent to 30 per cent.
Last week, Prime Minister Tony Blair backed Mr Brown's decision to abolish tax relief for pension fund dividends.
BDO Stoy Hayward is the UK member firm of BDO International, the world's fifth-largest accountancy network, with over 600 offices worldwide.
