How Gordon Brown cost pensioners £118 BILLION and counting
While I was at University, I remember one of the rare instances of a British politician taking action to solve a problem which he saw coming twenty or thirty years ahead.
The late Tony Newton, then a cabinet minister in Margaret Thatcher's government, realised that as people were living longer and the birth rate was getting lower, the then system whereby each generation's pension contributions paid the pensions of the previous generation was doomed.
This unfunded pensions system would become more and more unsustainable as the ratio of retired people to those of traditional working age became greater and greater, and collapse entirely some 30 years later (e.g. about now.)
Britain needed to move to a system of fully funded pensions, and that required either much higher taxes or higher contributions. Newton resolved to give people a real incentive to save by means of their occupational pension.
Newton took two steps to create that incentive, one negative and one positive.
The negative step, which I would not support in today's vastly different circumstances but was brave and far-sighted in context and defensible as part of the package, was to link the state pension to prices rather than earnings.
The positive step was to cancel double taxation of pensions when dividends were paid into a pension fund and again when the pension fund paid out to the pensioner, by scrapping the "ACT" (Advance Corporation Tax) charge on dividends paid to pension funds.
Over the next twelve years that policy was massively successful in promoting investment in pension funds, so much so that by the mid 1990's Britain appeared to be the only country in Europe which was well on the way to solving the demographic time bomb threatening pensions. In fact, at the start of 1997 Britain had more money invested in occupational pension funds than the whole of the rest of Europe put together.
And then the most disastrously misguided person ever to hold the offices of Chancellor and Prime Minister took office and threw it all away.
One of Gordon Brown's first acts as chancellor was to reimpose double taxation of pension funds - without, incidentally, also linking pensions back to earnings rather than prices.
This raid on pension funds was bitterly attacked at the time by the Conservatives and the pensions industry. Perhaps understandably but very unfortunately, the country was not interested in what the Conservatives had to say in summer 1997 and assumed that the pension industry were a vested interest whose complaints could be ignored.
The trouble is, if you take billions a year from an industry, and the amount keeps going, up the cumulative effects get huge.
Figures recently published by the Office of Budget Responsibility show that the annual impact of Brown's raid on the pensions industry is now £9.7 billion.
The OBR says the cumulative amount taken by the government from pension funds is now nearly £118 billion. But that does not begin to describe the havoc Brown's raid on pensions caused.
As this excellent article points out, a decade later it emerged that Brown
"was alerted before the budget that pension funds could lose £50billion overnight.
"As the new figures from the Office for Budget Responsibility show, abolishing pension fund dividend tax relief has cost them £117.9 billion between 1997 and 2014. Crucially, this figure relates only to the Treasury’s savings. The impact on pension savers is far more devastating."
"Each year the dividend payments that pension funds were stripped of would have been reinvested and grown. With even a modest rate of compound growth, the £2.3billion the Treasury saved in 1997 thanks to Mr Brown would now be worth around £5.5billion."
"Using the same logic, one financial expert calculates that the total amount stripped from the nation’s pensions could amount to as much as £260 billion. With less money in their coffers and with pensioners living longer and needing money for longer, pension funds soon ran into major difficulties."
"Thousands of companies closed their lucrative final salary schemes, which promised to pay a retirement income based on an employee’s length of service and pay. "
"Gordon Brown’s tax raid may have boosted the Treasury’s coffers, but it devastated the pension promises made to a generation of workers and changed the way we save for our retirement forever."
You can read the full article at
http://www.dailymail.co.uk/news/article-2613609/Revealed-Labours-stealth-raid-took-118BILLION-pensions-paving-way-end-final-salary-schemes-suddenly-unaffordable.html#ixzz3SuEUMkJb
Fine, you say, why hasn't the present government reversed it again?
In my personal opinion I would like them to do precisely that, but let's be honest here.
When you inherit a situation where the government is spending four pounds for every three pounds raised in tax and you have to try to eliminate a massive public sector deficit which is still way, way too large, finding the room to make a £9.7 billion tax cut while still reducing that deficit is extremely difficult.
The fact remains that even if the government could change the policy tomorrow, millions of people would still be far less generously provided for in their pensions because of Gordon Brown's utterly disastrous raid on pension funds.
I wasn't impressed by the people who celebrated when Margaret Thatcher died. And if I outlive him, I won't celebrate when Gordon Brown dies either. But in my opinion people have far more valid reasons to curse his legacy than anyone did to curse hers. Especially the millions of people who will be much poorer in retirement because of his mistakes for decades to come.
The late Tony Newton, then a cabinet minister in Margaret Thatcher's government, realised that as people were living longer and the birth rate was getting lower, the then system whereby each generation's pension contributions paid the pensions of the previous generation was doomed.
This unfunded pensions system would become more and more unsustainable as the ratio of retired people to those of traditional working age became greater and greater, and collapse entirely some 30 years later (e.g. about now.)
Britain needed to move to a system of fully funded pensions, and that required either much higher taxes or higher contributions. Newton resolved to give people a real incentive to save by means of their occupational pension.
Newton took two steps to create that incentive, one negative and one positive.
The negative step, which I would not support in today's vastly different circumstances but was brave and far-sighted in context and defensible as part of the package, was to link the state pension to prices rather than earnings.
The positive step was to cancel double taxation of pensions when dividends were paid into a pension fund and again when the pension fund paid out to the pensioner, by scrapping the "ACT" (Advance Corporation Tax) charge on dividends paid to pension funds.
Over the next twelve years that policy was massively successful in promoting investment in pension funds, so much so that by the mid 1990's Britain appeared to be the only country in Europe which was well on the way to solving the demographic time bomb threatening pensions. In fact, at the start of 1997 Britain had more money invested in occupational pension funds than the whole of the rest of Europe put together.
And then the most disastrously misguided person ever to hold the offices of Chancellor and Prime Minister took office and threw it all away.
One of Gordon Brown's first acts as chancellor was to reimpose double taxation of pension funds - without, incidentally, also linking pensions back to earnings rather than prices.
This raid on pension funds was bitterly attacked at the time by the Conservatives and the pensions industry. Perhaps understandably but very unfortunately, the country was not interested in what the Conservatives had to say in summer 1997 and assumed that the pension industry were a vested interest whose complaints could be ignored.
The trouble is, if you take billions a year from an industry, and the amount keeps going, up the cumulative effects get huge.
Figures recently published by the Office of Budget Responsibility show that the annual impact of Brown's raid on the pensions industry is now £9.7 billion.
The OBR says the cumulative amount taken by the government from pension funds is now nearly £118 billion. But that does not begin to describe the havoc Brown's raid on pensions caused.
As this excellent article points out, a decade later it emerged that Brown
"was alerted before the budget that pension funds could lose £50billion overnight.
"As the new figures from the Office for Budget Responsibility show, abolishing pension fund dividend tax relief has cost them £117.9 billion between 1997 and 2014. Crucially, this figure relates only to the Treasury’s savings. The impact on pension savers is far more devastating."
"Each year the dividend payments that pension funds were stripped of would have been reinvested and grown. With even a modest rate of compound growth, the £2.3billion the Treasury saved in 1997 thanks to Mr Brown would now be worth around £5.5billion."
"Using the same logic, one financial expert calculates that the total amount stripped from the nation’s pensions could amount to as much as £260 billion. With less money in their coffers and with pensioners living longer and needing money for longer, pension funds soon ran into major difficulties."
"Thousands of companies closed their lucrative final salary schemes, which promised to pay a retirement income based on an employee’s length of service and pay. "
"Gordon Brown’s tax raid may have boosted the Treasury’s coffers, but it devastated the pension promises made to a generation of workers and changed the way we save for our retirement forever."
You can read the full article at
http://www.dailymail.co.uk/news/article-2613609/Revealed-Labours-stealth-raid-took-118BILLION-pensions-paving-way-end-final-salary-schemes-suddenly-unaffordable.html#ixzz3SuEUMkJb
Fine, you say, why hasn't the present government reversed it again?
In my personal opinion I would like them to do precisely that, but let's be honest here.
When you inherit a situation where the government is spending four pounds for every three pounds raised in tax and you have to try to eliminate a massive public sector deficit which is still way, way too large, finding the room to make a £9.7 billion tax cut while still reducing that deficit is extremely difficult.
The fact remains that even if the government could change the policy tomorrow, millions of people would still be far less generously provided for in their pensions because of Gordon Brown's utterly disastrous raid on pension funds.
I wasn't impressed by the people who celebrated when Margaret Thatcher died. And if I outlive him, I won't celebrate when Gordon Brown dies either. But in my opinion people have far more valid reasons to curse his legacy than anyone did to curse hers. Especially the millions of people who will be much poorer in retirement because of his mistakes for decades to come.
Comments
When you are spending £4 for every £3 taken you don't have to raise your income, all you need do is cut your spending.
Ce ne est pas sorcier.
Even if they had reversed it in 2010, the amount taken from Pension funds between 1997 and 2010 would not have been far short of £100 billion and the impact including compound interest would have been about £200 billion.
its like saying "I put a £10 into the shredder each week. I have done this 20 weeks. I did think about stopping putting £10 into the shredder 5 weeks ago, but i didn't and anyway even if i had done so i still would have been £150 down. more so if you include the dividends I could have made if i had bought stocks with it instead. So I just continued putting £10 into the shredder each week"
P.s it really is that easy. If you don't have it don't spend it. Don't try and raise income to match your predetermined spending. Instead cut your spending to match your income.