Jeff Salway: Yet another unjust government raid on pension incomes

THE phrase “tax raid on pensions” is so indelibly associated with Gordon Brown that he could cure all the world’s ills and many people would still hasten to add a pension killer caveat.

To recap quickly, when he was cchancellor, Brown abolished a tax break on pension dividends in an attempt to raise £5 billion a year from pension funds.

The 1997 move has been described as the beginning of the end for the United Kingdom’s pension system, and while that claim ignores several other contributing factors, Brown will always be considered largely culpable.

However the present Chancellor of the Exchequer, George Osborne, and Bank of England governor Sir Mervyn King, are ensuring that in years to come Brown won’t the only one carrying the can for the “hidden theft” of pension incomes, as one campaign spokesman put it.

The bank’s recent decision to continue with quantitative easing by printing another £50bn was not only made with little evidence that the strategy is working, but with little regard to the impact on millions of pensioners.

And those repercussions cannot be underestimated. Pensioners have been hit hard by reduced investment returns, while those using annuities to convert their pension savings into a retirement income are already getting the lowest rates on record. The income paid through annuities to pensioners in retirement has been slashed by around a quarter since QE was first implemented three years ago – and the rates continued to fall this week.

But now those in drawdown arrangements – where the pension remains invested by income can be drip-fed from it – are also paying the price of QE.

Because QE is basically a gilt buying programme, the price on those gilts is rising, depressing the yields. And those yields are used to determine how much income can be drawn down from pensions.

The income that pensioners can take from their pension funds had already been cut last year,when the government reduced the maximum that can be taken from 120 per cent of the rate on comparable annuity to 100 per cent.

It sounds technical, but it translates into very real numbers, though many of those affected will not yet realise the extent to which their monthly income will shrink as their income levels are typically reviewed every three or five years. Someone whose drawdown arrangement is up for review this month faces an income cut of around 20 per cent, according to Rowanmoor Pensions.

It warned that pensioners up for their five-year review could be set for an income reduction of up to 30 per cent, assuming the latest round of QE drives gilt yields down even further.

The National Association of Pension Funds has warned that the bank’s short-term stimulus is leaving pensioners in “long-term pain”. Millions of people retiring this year and next will be left out of pocket as a direct result of a policy being pursued with no thoughts for the wider implications.

Pensions minister Steve Webb insists condemning pensioners to impoverishment in retirement is a fair trade-off if QE gets the economy growing again.

Which is fine, except 1) there’s little sign that QE is having the desired drip-down effect; 2) this government wouldn’t know a growth policy if it was 100ft tall, neon-lit and singing Growing Pains at the top of its voice, and 3) this short-term fix is one for which millions of retirees will be paying a painful price for the rest of their lives.

Like Brown’s so-called pension raid, the real implications for pensioners of printing yet more money may only become clear with hindsight. Will politicians ever tire of plundering the nation’s retirement savings?

Talking of depressingly inevitable, Royal Bank of Scotland has been told to withdraw adverts claiming it would continue to provide banking services “wherever we’re the last bank in town”.

The Advertising Standards Authority said the adverts gave a clear impression that RBS would protect the last branch in any town but said that it had failed to do so (pointing to Farsley in Yorkshire, left without a bank after its NatWest branch closed).

RBS’s quiet closure campaign means an admonishment has been on the cards. The taxpayer-backed bank closed several dozen branches last year, with outlets in Glasgow, Ayr, Edinburgh, Aberdeen, Dundee, Arrochar, Dounreay and Perth among those affected.

In fairness to RBS, it does maintain a rural presence through its mobile banking services. Yet making a small town a stop on its route – the kind of service RBS now claims its advert was alluding to – doesn’t compensate for closing its last branch when it has spent a fortune in taxpayer money on misleading adverts suggesting it wouldn’t do such a thing.