FEAR OF FINANCE

The financial services industry is striving to make pension plans simple, cheap and attractive to the millions still in work and those who follow them on to the treadmill. But recent events have conspired to cloud the issue instead of clarifying it.

Two weeks ago the Labour Party published a blueprint for future pensions which back-tracked on earlier proposals to make it compulsory for everyone in work to contribute to a pension plan, but put little in its place. It did, however, make the deeply damaging allegation that pension plans swallow up to 25 per cent of contributions in charges and administration.

Individual spokesmen for the pensions industry say privately that 25 per cent is a worst-case scenario and measures start-up and management costs of a poorly performing fund over a long period. Others compare it to the margin between mortgage rates and the rate paid to savers. Some stress the value of advice which goes with a pension plan. But if it is a lie the industry needs to nail it quickly, before it undermines public confidence in personal pensions still further.

It has been seized on by Philip Warland, the director-general of Autif, the unit trust providers' association, to support his claim that unit trusts are the best vehicle for pension plans. Pension plans and unit trusts are different animals of course.

Both incur significant charges. But the Government promotes pension plans through tax relief on contributions, reducing the net cost of a pounds 1 contribution to 76p for a standard rate taxpayer and just 60p for a top-rate taxpayer. Money invested in unit trusts and investment trusts inside a personal equity plan has already been taxed in full and only the resulting income and gains are tax-free.

Autif would like the Treasury to sanction a new kind of investment vehicle which limits tax relief on contributions to the standard rate but promises to tax the income at the same rate. This might provide an attractive option for the millions who presently have little or no pensions in prospect, but there is a real risk of creating further complexity where the crying need is for simplicity.

The insurance industry working party led by the Prudential also reported this week, recommending the removal of limits on the annual amount individuals can contribute to their pension funds, and allowing them to contribute out of unearned income. Under current rules tax relief is limited to 15 per cent of earnings for occupational pensions, and 17.5 per cent for personal pensions, rising with age after 35 to 40 per cent after the age of 60, but to qualify for tax all contributions must come out of earned income, which effectively disqualifies non-working spouses.

This reform has the merit of growing smoothly out of existing provisions, but such changes could allow millions of people to claim increased tax relief on contributions and cost the Treasury billions a year. The Treasury insists that reforms should be fiscally neutral, which means one person's gain must be balanced by another's loss.

The Pru's report recommends creating single pots to hold the invested funds of each individual, including personal and state pensions. In effect, this means the privatisation of state pensions, which will appeal to Tory right-wingers and perhaps to the insurance industry's fund managers but can only raise the hackles of anyone who does not trust the state to honour its obligations.