Pensions funds raided to the tune of £5 billion

Failure to review your pension contributions could leave you considerably worse-off

Gordon Brown had previously ignored warnings that removing the tax credit on dividends could wipe billions of pounds from retirement savings. He defended the move, made in his first budget in 1997, insisting it was “the right decision for the future of the economy”.

A typical saver in a money-purchase scheme, where the value of the fund depends on the stock market, may have to increase their savings by about £500 a year to bridge the gap, with millions of others in final-salary schemes also affected.

Q: What does this mean in simple terms?
A: In his first budget in 1997 Brown scrapped tax relief on share dividends paid to pension funds. The move deprived pension schemes of £5 billion of tax relief, though some analysts think the damage could be as much as £100 billion.

Q: What could the affects be for savers in a money-purchase, personal or company scheme?
A: If your pension fund is invested heavily in shares it could be worth less. You may need to contribute more to compensate for the loss.

Q: What additional contributions levels will need to be made?
A: It depends on your age, how much you saved before the tax change, where it is invested and what you feel you will need to be comfortable. Savers who have more of their money tied up in cash and bonds, which were unaffected by the tax change, have less to worry about. You should obtain professional advice to ascertain and calculate whether you are on track to meeting your retirement target.

Q: What will this mean for savers in final-salary schemes?
A: The loss of the tax relief has made the schemes more expensive to run. More than two-thirds have closed their schemes to new employees in the past 10 years. Others have frozen the benefits already built up. All future contributions are rerouted into a money-purchase pension, whose performance is linked to the stock market. In the most drastic cases the schemes have been wound up completely.

Employers contribute 16 per cent of pay to the average final-salary scheme. In money-purchase plans, employer contributions are typically only 4 per cent to 7 per cent, according to pensions administrator, DC Link.

Q: What other options are there for boosting retirement income?
A: In the 2007/8 tax year, you and your employer can invest an amount equivalent to your annual salary each year and receive tax relief on the contributions up to a maximum of £225,000. In the year before retirement the cap is dropped, enabling you to give your pension a last-minute boost.

If your employer will not allow you to increase contributions, you could consider utilising a personal pension as well.

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