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Wednesday, 5 August 2009

Gordon grabbed your pension

There is a deficit in the nation’s pension funds of £96 billion. How much of that is due to Gordon Brown’s elimination of tax credits for dividends received by pension funds?

At the time of the measure the cost was estimated at £5 billion per year, but clearly the figure will have grown with the economy as the relative value of business cash flows, and thus profits, will increase with inflation. For the purposes of this argument, let us ignore all the other factors such as that actually impacted corporate profits and assume look merely at a steady state 1997 economy would have produced in dividends if it had simply grown at a hypothetical constant inflation rate of 2.5%.

Then we need to take into account the loss of investment income from the cumulative shortfall over the last 12 years. I shall assume a reinvestment rate of 6%, which is somewhat on the low side. Lo and behold, we come up with a cumulative deficit, with inflation adjusted tax grabs and lost investment income factored in, of £95 billion.

So 99% (plus or minus 15%) of the deficit in your pension fund is down to the man who will walk away from his job next year with a guaranteed unfunded pension equal to 50% of his salary and to which he has contributed not one jot.

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