Q&A: pension tax row
Updated on 02 April 2007
Gordon Brown's decision in 1997 to remove tax relief on pension fund dividends has revived the debate over his prime ministerial credentials.
Why the present row?
The Times newspaper lodged a request in February 2005 for information about Gordon Brown's decision in his first budget, in July 1997, to abolish tax relief on dividends paid into pension funds.
The Times wanted to know whether the chancellor had been warned about the potentially devastating effect of the move on people receiving pensions or contributing to pension funds.
After several delays, the Treasury finally released the requested papers last Friday.
What happened in 1997?
Two months after Labour's May 1997 general election victory, the new chancellor, Gordon Brown, announced that he would abolish the dividend tax credit on pension funds.
Ed Balls, economic secretary to the Treasury, explained last week that the move was intended to remove an anomaly which had encouraged pension funds to pay out in dividends rather than investing for the long term.
At the time, it was intended that the measure would be offset by a simultaneous cut in corporation tax.
All four reports submitted to Gordon Brown said the value of pension funds would fall.
What advice did Gordon Brown receive?
The chancellor received four Treasury papers after the 1997 election. They outlined a range of scenarios, while conceding that there was a degree of uncertainty about their predictions.
The papers anticipated that pension fund losses incurred as a result of the abolition of the dividend tax credit might be mitigated by a buoyant stock market.
But all four said that the value of pension funds would fall - one predicting a drop of up to £75bn. And one of the documents, from the Inland Revenue, concludes that "abolishing tax credits would make a big hole in pensions scheme finances".
What was the result?
The government says pensioners have been hit in recent years by the £250bn fall in stock markets, combined with the fact that people are living longer and the fact that, in 1997, companies were not making the necessary provision for employees in final salary schemes.
By contrast, critics, including the Conservatives, say that the move has been in part responsible for the spectacular decline in final salary pension schemes over the past decade.
Speaking to the Financial Times today, pensions expert Stephen Yeo, who advised former Tory pensions spokesman David Willetts, said the move had been unhelpful but had not been a major contributor to the decline.
By contrast, Aon Consulting's Donald Duval, also in the FT, said it had had a bigger impact than many people realised, in part because employers had failed to offset the move by using the corporation tax cut to increase pension contributions.
And CBI Director-General Richard Lambert has attacked the chancellor's decision as a "misjudgement".
In fact, the 1997 decision is thought to have had more or less the effect predicted in the reports to the chancellor: that it would cost pension schemes some £4bn a year - or a £50bn reduction in their existing asset values.
