Stirring the pot

12 February 2010 8:00 am

Labour promised (but failed) to turn us into a nation of savers and now it is the turn of the Tories. Yet the proposals in A New Economic Model: Eight Benchmarks for Britain leave many questions unanswered.

Labour was criticised for its £5bn-a-year tax raid on Britain’s pension funds, which has had a devastating effect on people’s retirement pots.

It led to the closure of dozens of gold-plated final-salary schemes and now millions of people’s pensions will be totally reliant on the vagaries on the stockmarket.

The Conservative Party has dangled the carrot that it will reinstate the dividend tax credit but such a boast looks nothing more than spin. If it really intended to reverse the effects of the tax raid then it would have been the paper’s headline, not a throwaway line on page 11 on how it hopes to get us to salt away more of our money.

Some of the Tory plans are not even new. The paper claims it will encourage people to save more for retirement by promoting auto-enrolment into pensions but this will happen regardless of who is in power.

Its proposed “powerful” new Consumer Protection Agency promises to clean up bank charges and credit card terms but again the horse has already bolted on these two fronts.

One proposed measure will mean we actually save less for our future. George Osborne wants to ditch child trust funds for all but the poorest children because “handing out new baby bonds to the rest of the country is a luxury we can no longer afford”.

He is right, of course, we cannot afford them. Besides, CTFs benefit only those families that have enough spare cash at the end of the month to put some aside for their children.

But if the Tories go so far as to scrap CTFs for the majority, they might just as well get rid of them altogether. The party says it “will fight for the poorest” but if it wants to help in any meaningful way, CTFs are not the answer.

These funds will end up being an almost worthless pot if the only contribution has been the Government’s free handout of £500. If the full £500 was invested and grew at 5 per cent year, a CTF would be worth around £1,000 after 18 years.

But if the Conservative proposals fail to convince in the main, one or two proposals will be a hit with the older generation.

For starters, they can look forward to a higher inheritance tax threshold and not being forced to take an annuity at the age of 75.

Indeed, the decision to scrap compulsory annuities at 75 is one that should be applauded - and little wonder that financial advisers, who have long lobbied on the issue, have welcomed the move.

Flexibility is key with increasing longevity - and at a time when fewer people are lucky enough to pick up a gold-plated, final- salary pension.

Being forced to buy an annuity is not only a postcode lottery but it can also be a lottery in terms of timing. Pity the poor retirees who are being forced to buy an annuity today, given that rates fell by an average of 8 per cent last year. This is the biggest fall since 2002, when rates fell by 12 per cent, according to annuity specialist Billy Burrows.

It makes sense for there to be a threshold so that people with smaller pension pots would still have to take an annuity - it is the option many advisers admit would be in their best interests.

Paul Farrow is digital personal finance editor at the Telegraph Media Group

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