A joint investigation by The Independent on Sunday and BDO Stoy Hayward,
the specialist accountancy and business advisory group, has revealed that Mr
Brown's 1997 decision to tax dividends paid into pension funds will have far
greater consequences than previously thought. The £100,000 figure represents
a reduction of up to 13 per cent in the value of the pension pot a typical
employee who pays into a defined contribution scheme could expect to save over
the course of their working life.BDO Stoy Hayward used two examples in its
investigation - a 25-year-old earning £20,000 in 1997 and a 35-year-old earning
£50,000 in the same year. The accountants assumed that both would work
uninterrupted until they retired aged 65, in 2037 and 2027 respectively.
In both cases BDO assumed that the pair's salaries would rise by 5 per cent per
year and that they would pay 4 per cent of their wages into a pension fund. It
was also assumed that the stock market would continue to rise in line with
historic trends and that shares would pay a typical 3 per cent dividend yield.
Bonds were expected to continue to pay an interest yield of around 4 per
cent. BDO Stoy Hayward calculated that, while the impact of Mr Brown's tax
raid was relatively modest in its early years, by the time the employees were
approaching retirement, the effect of the reduction in the compound dividend
yield would very substantially reduce the amount in their funds.
In the case of the 25-year-old, the total fund available on retirement would be reduced from £920,000 to £800,000. The 35-year-old could expect to have a retirement fund of £980,000 compared with £1,080,000 had Mr Brown not made the tax change. The accountants also concluded that the 25-year-old would receive £6,000 less in annual pension payments on retirement, while the 35-year-old would see his pension reduced by £5,000 per year. Even taking into account future inflation of 2 per cent per year, the reduction in the size of the two pension funds would be £60,000 for the 25-year-old and £57,000 for the 35-year-old.
Prior to 1997, for every £80 of dividends received by a pension fund, a further rebate of £20 would be received by the fund from the Inland Revenue. When Labour came to power in 1997, pension funds rarely showed a deficit and looked ripe for
taxation. Mr Brown is set to retire on a guaranteed pension of at least £100,000 a year, thanks to the generous final-salary pension scheme enjoyed by MPs.
No wonder that for the first time more people believe he has been a bad Chancellor than a good one. What delicious timing for the chickens to be coming home to roost.