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Retreading the party lines

If the British electorate were to vote solely on the basis of being savers and investors, why should they vote for your party?

Labour has helped savers and investors in the last four years and we plan to go further still. So far, we have introduced several new savings vehicles, such as Isas and stakeholder pensions.

Isas are already more successful than Peps. In their first year, 8.5 million people invested over £28bn in Isas – that is a third more than was invested in Tessas and Peps in their last and most successful year.

Stakeholder is providing people with a safe, flexible, low-cost way to save for a pension. Overall, more is now being saved for pensions than ever before and stakeholder will help sustain this.

A stable and growing economy is fundamental to investors and, by implementing fiscal and monetary reform – including reducing the national debt and giving independence to the Bank of England – we have delivered low inflation and high employment.

The Conservatives plan to remove starting and lower-rate tax on savings and to abolish the ordinary rate of income tax on dividends by 2003/04.

We will retain the existing tax credit on dividends and will restore to individual non-taxpayers in receipt of dividends the right to claim their credit in cash.

We propose, by 2003/04, to take one million pensioners out of tax altogether by increasing the age-related personal allowance for the over-65s by £2,000. Large numbers of pensioners will pay less tax. For many, the reduction in tax will be £440 a year or about £8.50 a week.

We will reform the rule on annuities which currently forces pensioners into buying an income lower than they may have reasonably expected. We will reform capital gains tax and are committed to reviewing the operation of stamp duty on share transactions.

Our proposed reforms to state and private pensions would make saving far more attractive and straightforward.

Over the last few years, the Government has created a chasm between the level of the basic state pension and level of the means-tested minimum income guarantee. By 2003, the means test will be over 30 per cent above the pension. As a result, for a lot of people who could only expect to achieve a modest private income to top up their state pension, it is simply not worth saving.

Instead of trying to correct this by introducing another complicated scheme (the pension credit), what is needed is a higher basic pension on which people can build their private savings and get clear of the means test.

How important is advice in the provision of pensions?

As with any investment decision, it is important to get the advice that is appropriate.

The Government took the decision, when stakeholder pensions were introduced earlier this year, to allow people to be in both an occupational pension and a stakeholder pension as long as they earn less than £30,000 a year.

Also, having a Cat-standard product, whose management charges are capped at 1 per cent, which has to be flexible in terms of contributions and portable from job to job, reduces the possibility of people buying a product which turns out to be bad value or wrong for them.

The pension and savings markets have become increasingly complex over the last few years.

A Conservative Government would obviously advise savers and investors to gain professional advice on the best way to save for their future.

Given the very great complexity of pension choices currently, advice is obviously very important. Successive Governments have paid lip service to simplicity while making the pension system steadily more complicated. Even with good advice, pension planning is becoming ever more difficult and a radical simplification is called for.

What are your plans to increase the levels of pensions and savings?

We will introduce the new pension credit from 2003. This will mean pensioners with modest occupational pensions will get a cash reward for their thrift. At present, they lose out. We also want to increase the take up of second pensions. We are encouraging those who can save to do so with stakeholder.

The pension credit will ensure that it pays to save. The new state second pension will give a much more generous second pension to the low paid, to carers and to disabled people with broken work records than they had under Serps.

For savers more generally, we have said that we will maintain the level of maximum Isa contributions at £7,000 a year until 2006.

Our proposal to abolish taxes on savings and dividends means no one will pay income tax on savings or dividend income except at the upper rate. We will restore the right to claim dividend credits for people too poor to pay tax. For millions of people, this will end a system under which they pay tax on income they earn and are then taxed again on interest or dividends.

There are 17 million households with savings and 12 million private shareholders, the vast majority of whom will gain from this proposal. We will also restore to 630,000 individual non-taxpayers in receipt of dividends the right to claim their credit in cash.

We would free people from having to buy an annuity by the age of 75, except to the extent required to achieve a total pension income (including state pension and any Serps) above the level qualifying for social security benefits.

We will put in its place a simple retirement account mechanism within which the pension beneficiary can choose their own investment policy within prescribed guidelines.

Drawings from the retirement account will be subject to income tax. Any capital remaining on the death of the beneficiary and their spouse will pass to the individual&#39s estate.

We propose to allow younger workers freedom to opt out of basic state pension and build up a real funded pension. The Government would underwrite the scheme so the resulting pension would never be less than the basic state pension.

We will simplify arrangements for the Individual Pension Account, removing the requirement to invest in it through a pension scheme. The IPA will operate like an Isa or Pep. It will be subject to the tax rules applying to pensions and within similar investment rules as apply to Isas but without the need for the administrative costs and restrictions of pension scheme membership.

We propose the state pension should be increased substantially and maintained at a decent level to provide a floor for private savings to build upon. Beyond this, we would ensure everyone either joined an occupational pension scheme, if available, or had an Owned Second Pension Account (essentially the same as stakeholder except it would be compulsory). Initially, the level of compulsory contributions would be minimal but, by getting people in at the start of their working life and by ensuring OSPAs were mass-market products, we would hope to increase awareness of the need for pension saving.

Will stakeholder be a success and would you replace, reform or refine it in any way?

We believe stakeholder will provide a good savings option for many people. We will always be ready to look at ways to improve provision.

People will be free to take out stakeholder under a Conservative Government. But, as a direct result of the Labour Government&#39s shift from targeting low-income earners to targeting moderateto high-income earners, stakeholder may not spread pension provision.

People with no existing private provision are unlikely to be tempted into buying stakeholder. Those investing are likely to be people who want to swap their existing pension for stakeholder.

Stakeholder will have a detrimental impact on the quality of pensions offered by private firms. According to research, almost three-quarters believe the proposals will accelerate the trend by employers to switch to money-purchase provision and away from final-salary schemes. Stakeholder could cost British business up to £1.6m a year to administer.

Research has found few people understand stakeholder and many will find they would have been better off if they had used other savings vehicles or else merely relied on means-tested benefits.

Stakeholder will clearly be popular with certain groups but is unlikely to make a big difference to those on modest incomes with no occupational provision. Until they are made compulsory, people will go on either spending their money or finding other non-pension routes of saving.

Will stakeholder be made compulsory?

Stakeholder is one of a number of options. We want people to choose between stakeholder, occupational and personal pensions as appropriate. You need to encourage people to save for a pension – that means increased incentives. That is why we have simplified the rules on concurrency and why we are introducing the new pension credit – to ensure that it pays to save.

The Conservatives have no plans to make stakeholder pensions compulsory.

In the medium term, stakeholder will have to be made compulsory but the Government does not like to admit this. It will also have to address the issue of the needs of the self-employed, which policy-makers have failed to deal with.

What is wrong with your opponents&#39 policies on pensions, investments and savings?

The Conservatives have made promises on tax and spending they cannot pay for. Most of the benefit would go to relatively few people.

Their policy for encouraging people under 30 to opt out of paying National Insurance and to put the money instead in their own personal pension would not work. It would create an immediate black hole in the National Insurance Fund (which pays the pensions of today&#39s pensioners) of £5bn (rising to £6bn at the end of the spending review period) and the £500 annual rebate which they would give people would not even buy them back the value of the basic state pension. To do that, a man would have to start saving £500 a year at 14 and a woman at 10.

In Labour&#39s first three years, the savings ratio fell from more than 10 per cent of GDP at the time of the last election to just 5.5 per cent.

Despite Tony Blair&#39s solemn promises, Tessas and Peps have been abolished and replaced by Isas. Incentives to save have been reduced by the extension of means-testing in the benefits system.

Labour&#39s abolition of tax credits is costing pension funds £5bn a year and means people will have to choose between putting more into their pension or facing a lower pension when they retire. Gordon Brown also abolished dividend tax credits for non-taxpayers. This cruel stealth tax means people too poor to pay income tax can no longer reclaim tax on any modest dividend income they may have. All in all, some 300,000 pensioners and 330,000 additional non-taxpayers will lose an average of £75 a year.

Capital gains tax retirement relief allowed small businesses to be sold free of CGT when the entrepreneur was over 50. Abolition of this relief will significantly dent the value of their retirement capital and will hurt many small businessmen whose pension was effectively the business they had built up.

The Conservative pension proposals amount to peanuts for today&#39s pensioners and privatisation for tomorrow&#39s. If millions of young workers opted out of the state scheme, not only for second-tier provision (as we propose) but out of the basic state pension, this would create a huge hole in the National Insurance Fund. They have no answer as to how this would be filled.

Labour propose more than half of all pensioners will need to go through some sort of means test to get a decent income. This will make planning for old age more difficult.

Given criticisms by consumer groups, how will you ensure that changes to polarisation will not harm consumers?

There is more product choice for consumers than ever before. With better technology, there are more ways than ever of buying them. Faced with these choices, what consumers need is clarity about the products – what risks they entail, how they differ from other products and what obligations they have.

We will require a financial intermediary to make clear whether they are a tied agent or IFA. The FSA will be charged with monitoring this territory. We will also require all retail financial products and services purchased by consumers and advice about them to be regulated by the FSA to ensure transparency of charges and integrity of products.

We have expressed real concern about changes to polarisation. There should be close scrutiny of the effects.


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