A consumer&#39s view

With only three weeks left before the end of the consultation period on the Pension Green Paper on April 11, it is time for consumers to make their voices heard. There are many points which require a rethink.

First, the proposal for a lifetime limit on the size of an individual&#39s pension fund of £1.4m should be scrapped or increased to a higher level. Very few individuals save the maximum under the existing legislation, so there is little point in introducing a cap now.

More important, what will really upset savers is the fact that civil servants and MPs still enjoy index-linked pensions which, in many instances, would cost well over £1.4m to provide if the scheme were funded. Why should the rest of us have to suffer? If Chancellor Gordon Brown is afraid that the really rich will take advantage of the system, raise the maximum to £5m.

If the cap goes ahead at £1.4m, it could be a real vote loser among the middle classes. At today&#39s annuity rates, £1.4m will provide a pension of around £112,000 for a male aged 65 or £90,000 for a female aged 60. This is hardly stinking rich. Why should higher earners be restricted in the amount they can save for retirement?

There is even an argument for saying that civil servants&#39 index-linked pensions and job security are disproportionately generous and an unfair burden on the majority of taxpayers who do not enjoy these benefits. It is no longer true that civil service salaries are significantly lower than private sector wages, which was always given as the reason why public sector workers enjoyed such generous pensions. It is time they paid a realistic amount for these benefits.

The proposal to bring drawdown pensions in line with annuities is barmy to say the least and would do even more to deter individuals from saving for retirement. One of the main attractions of income drawdown is that, if the individual dies before 75, the balance of the pension fund is paid back to the estate or to nominated individuals, albeit with a tax charge of 35 per cent.

The Inland Revenue&#39s simplification proposals, published with the Green Paper, plan to limit death benefits for those who die during income drawdown to the value of the fund at retirement less the benefits taken out. All the investment growth in the fund would revert to the provider. This is nonsense and should be scrapped.

The proposal for “value-protected annuities” would be popular because it would effectively bring them in line with the current income drawdown situation, where on early death any balance is repaid to the deceased&#39s estate. However, this does fly in the face of the Treasury&#39s concern to retain the cross-subsidy of annuities.

Life companies are already having to top up their annuity funds because of fast increasing life expectancy. The requirement to pay back money on early death would force them to drop annuity rates substantially, requiring individuals to save even more. If this finds its way into legislation, there is no justification for retaining the 35 per cent tax rate on money returned to the estate. It should be taxed at the individual&#39s marginal rate. Why should lower-income families subsidise the well-off?

Critics have pointed out that the Green Paper does not address the central problem, which is that the basic state pension is not enough to live on, hence means-tested top-up payments and the minimum income guarantee. But they must know that the cost of raising the state pension to a meaningful sum would be prohibitive. The basic state pension already costs over half the entire social security budget. With increasing longevity and fewer working taxpayers, the cost would be unsupportable.

What is required in the long term is to amalgamate taxation and benefits so that individuals do not have to claim means-tested benefits but receive benefit automatically when their income falls below a certain level. What is taxation but means-testing under another name?