Money: Fear of Finance

Cautious investors could be popping down to the Post Office to buy a personal pension from National Savings if New Labour gets into power and the Civil and Public Services Association, which represents National Savings staff, gets its way. Labour MP Frank Field submitted a private member's bill to promote the idea this summer but it was talked out. With a Labour government he hopes for a better hearing.

Few would dispute the claim that, with lifetime employment in apparently terminal decline and the state pension shrivelling, personal pension plans are the best way to provide for old age (although it cannot be said too often that a company-sponsored scheme which the employer contributes to is always going to be better than a personal scheme which the employee pays for alone).

But personal pension plans are invested largely in company shares, and although this has been the best investment over the long-term and over almost all periods over five years, shares could conceivably collapse as they did in 1974 and 1987. Most of the population which had some kind of private sector pension to look forward to then had company pensions, or "with-profits" pension policies which the providers smoothed from year to year.

Things would be different now, if the market collapsed just as a generation came up for retirement. Under rules introduced last year, it is possible to invest a pension fund on retirement and live off the income before buying the final pension when the fund has recovered. But whichever way you slice it, personal pensions invested in shares could vary greatly according to luck and the timing of an individual's retirement.

A National Savings Pension Plan would, however, be invested in National Savings products, guaranteed by the government. Bryn Davies, a director of Union Pension Services, thinks they should be invested in fixed-rate long-dated stocks which would give a guaranteed return at retirement and even beyond.

The longest existing stock is Treasury 8 per cent maturing in 2021, which last week was offering 8.12 per cent a year for 25 years. If the NSPP offered immediate tax relief on every pound invested and the interest was tax-free, and reinvested tax-free each year, it could provide a tidy return. Another possibility would be to invest in index-linked government stocks which are guaranteed to inflate in line with the cost of living and also pay an inflation-linked rate of interest, currently around RPI plus 3.6 per cent.

With a limited range of investment instruments an NSPP should cost much less to administer than personal pensions. As such, they should appeal to low-paid and contract workers who cannot guarantee to make the regular monthly payments of pounds 30 or more which most personal pension plans demand.

If inflation remains low, the pensions could be so popular that National Savings was overwhelmed with money, tempting the government to cut the rate of return or spend more. But if inflation revives, fixed returns could fall below the rate of inflation, creating a massive erosion in the value of the pensions for those who could least afford it.