More Bad News on Pensions
I become more and more convinced that the damage they are doing to the country's pension provision is on its own sufficient grounds why Britain absolutely cannot afford the re-election of the Labour government.
It is bad enough that in his first budget Gordon Brown made pension funds liable to Advanced Corporation Tax, a form of double taxation which effectively takes £ 5 billion a year from pension funds. This was the first and worst "stealth tax" - Mr Brown hoped that people would not realise that a change to something with a remote-sounding name like "Advanced Corporation Tax" meant that their pensions were being taken away.
Then Mr Brown introduced an atrociously complicated "pensions credit" system which destroys incentives to save because anyone who does invest for their future loses 40 pence of pensions credit for each pound of income he or she provides. Surprise surprise - as incentives to save have been destroyed by Gordon Brown, the level of saving has fallen.
The combination of these two disastrous measures has been to erode the large bank of investments which had been built up under the previous government - in 1997 there was as much invested in pension funds in Britain as the whole of the rest of Europe put together, but that is no longer the case. As even the former Labour pensions minister Frank Field has admitted, this government inherited one of the strongest pensions positions in Europe and how has one of the weakest. Unless something is done 12 million people face an old age in poverty.
You might think that after such a deplorable record even this government could not make matters worse but alas, Gordon Brown is up to it. Not content with the damage he has already done, the chancellor is introducing from next year a 55% tax on pension funds which exceed a lifetime value of £1.5 million in April 2006, rising to £1.8 million by 2010. This will catch many people on middle incomes who are paying into occupational pensions schemes. For example, Pensions consultants Hewitt suggest that a 30 year old with a salary of £40,000 who is a member of a Final Salary pensions scheme could be caught. Of course, many final salary pension schemes have been closed to new members as a direct result of the Labour policies described above. But those who are fortunate enough to be part of such a scheme, who have generally carefully arranged their career choices to ensure that they have that security for their old age, and paid substantial contributions into it, will rightly be incensed when they find their thrift punished by Mr Brown's latest plan to tax pensions.
This will do even more damage to incentives to save, so fewer people will save, and the long-term pensions problem will get even worse. The scale of the effort which will be required is immense even now - after another five years of the ruinous policies of the present government it would be even worse.
The demographic time-bomb which we face as people are living longer has been obvious for 20 years. Although the NHS has had plenty of problems, the fact is that under both Conservative and Labour governments, life expectancy has significantly increased.
With longer lives and a lower birth rate, people of traditional working age are a lower proportion of the population and older people a much higher proportion. If we want to avoid a huge problem in paying for their pensions and medical and social care, we need to either have vastly higher taxes, or provide incentives to save.
Present Labour government policies have reduced those incentives and are causing an increasing proportion of people to face an unpalatable choice between spending their old age in relative poverty, or working almost until they drop.
A more flexible attitude to retirement may be part of the answer, but I don't believe it would be at all desirable to force people to continue in full-time work past 65. However, where people are allowed to organise their own working patterns, very few opt to work full-time up to some arbitrary date and then completely stop work. I know self-employed people who still work part time well past the age of seventy - and are still good at their jobs. This would not suit everyone, but it might suit some who do not currently have the option
I suspect that a significant number of people aged over 60 or 65 who were given the choice would welcome the opportunity to work part time, with their part-time salary supplemented by a partial pension, when they no longer had the energy or wish to remain in full-time employment but still had plenty to offer.
However, the most important task for the next few years is to dismantle the disincentives for savers which Brown has put in place during his disastrous chancellorship, and give people incentives again to invest in their savings and their future.