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Brown put his foot down on Sipps – now we need to reach those who need help

The only surprising thing about Gordon Brown’s U-turn on allowing residential property as a qualifying investment in Sipps is that he ever agreed to the concession in the first place.

As Virgin Money so aptly described the situation, allowing the relatively wealthy – many of whom already have second homes – a big tax break to acquire yet more property, squeezing out first-time buyers and low-paid agricultural workers in rural areas was never a very socialist policy.

Virgin Money’s reaction was: “It would have opened the floodgates for a 4.6bn tax windfall for higher-rate taxpayers and already looked like creating an environment rife with opportunities for misselling inappropriate pension investments.

“What we need now is a proposal to channel more of the 15bn pension tax relief pot to those who need it most – people who are saving very little or cannot afford to save at all.”

Everyone claims that the number of people who would have taken advantage of the tax breaks to put residential property into their Sipp was likely to be small but there was no guarantee of this and the likely loss of tax revenue to the Treasury could have been even more than 4bn-5bn.

If Standard Life managed to take 1bn into its Sipp, designed to offer residential property as an option, this alone would have cost the Treasury up to 400m in lost revenue. The total loss of tax revenue across the industry could have been huge.

Industry estimates put the number of individuals likely to open a Sipp to take advantage of the property situation at around 2.5 million over the next five years. With tax relief on pensions already running at 19bn a year, it is hardly surprising that Gordon put his foot down.

However, what this highlights is the fact that giving tax incentives to encourage relatively wealthy people to save for retirement is expensive and does not channel the help to those who need it.

With Turner looking increasingly like being ignored, the future is not looking bright for pensioners unless Brown is planning a root and branch reform of taxation and benefits when he becomes Prime Minister. It is long overdue.

The latest research from the Pru reveals just how inequitable our current system is. One in five pensioners struggle to survive and 17 per cent live on an income of under 5,000 a year. A third of pensioners live on under 7,500 a year. Yet at that level, they are taxpayers – albeit only just – even if they do qualify for benefits such as pension credit.

The Pru research also shows that nearly 20 per cent of pensioner have to return to work after retiring, 8 per cent are forced to use assets they had intended to leave as an inheritance to children or grandchildren while a shocking 2 per cent said that their money worries were so bad they have contemplated suicide.

Some, those who are homeowners, could, of course, ease their situation by taking out an equity withdrawal plan but all the time raising a lump sum from the property simply makes the pensioner ineligible for Social Security benefits, there are only a limited number of relatively wealthy pensioners who can improve their standard of living in this way. As the Council of Mortgage Lenders said on the publication of Turner’s recommendations, it is a pity that he did not consider housing wealth.

There is a real incentive for the Government to look at the interaction of state pension, means-tested benefits and equity withdrawal schemes and remove the obstacles that stand in the way of elderly people supplementing their income through this route.

Pru executive director Roger Ramsden says: “The key to having enough income in retirement is to plan well in advance. It is good to see two-fifths of the pensioner population have reviewed their finances with an adviser in the past two years but people need to start planning a long time before they enter retirement.”

True but with most families paying off a hefty mortgage, sometimes even into retirement, not to mention the high and increasing cost of putting children through higher education, there is often no money left to save. The sooner the Chancellor addresses these real problems, the better.

Money Marketing50 Poland Street, London W1F 7AX

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