A forceful way with pensions

TAX up by 10p in the pound. That's not a Budget prediction. It's certainly not something that would have been suggested at either of the just finished party conferences.

But it's a prospect that both the main parties are increasingly being asked to face up to.

Ten per cent of income is roughly what today's workers might have to put aside to ensure a reasonable standard of living in retirement.

Too few people are doing so currently and the costs of a state safety net are spiralling as the population ages. So people on both left and right are suggesting everyone should be forced to save. New here is the "forced to" bit and hence the likely association in the public's mind with tax.

Last week in these pages Labour MP Frank Field proposed compulsory pension savings. This week on the facing page the Adam Smith Institute, the free- market think-tank, says broadly the same.

This perhaps surprising consensus for compulsion is a reflection that otherwise those who do save will pay twice: once for their own pensions and then for the welfare bill for those who don't. Everyone must pay now or some of us will have to pay more later.

But what government could get away with such a levy? People would need to be sure their money couldn't be raided by politicians, as has happened with National Insurance. Hence the institute's support for private pension companies to manage individuals' money. Frank Field instead talks of a National Pension Savings Scheme for people whio are not currently covered by employer or personal pension plans. Individuals who have suffered at the hands of pension companies might go along with him.

Either way the proposals are some way from fruition. One thing's sure: the current system is failing to deliver.

More than four million of Britain's 10 million retired have a total income of less than pounds 5,000 a year, according to the NatWest. And half of pensioners say they have real financial problems.

SMALL shareholders in TSB and in many of the bid-for electricity companies have a right to feel slightly cheated. Encouraged to jump on board the share-owning bandwagon at privatisation, they now stand to get a worse deal than many of the big City institutions.

The crux of the issue is the special dividends on offer in many bids. Lloyds' takeover of the TSB involves a 68.3p special dividend paid on each TSB share. Many of the Rec bids carry even bigger dividends. But how special these are depends on your tax status.

The dividends are subject to income tax. Any cash or shares offered in a deal aren't. Basic-rate taxpayers get the dividends as quoted while higher- rate taxpayers face another 20 per cent tax.

Non-taxpayers - the pension funds managed by City institutions who are the chief makers and breakers of any deal - can reclaim the 20 per cent already effectively deducted from these dividends. In the TSB deal that means another 17p a share, more with many of the Recs. Small shareholders in Peps or non-taxpayers can also reclaim this tax. But most won't be in this category.

So what can you do? London stockbroker Killik & Co suggests investors consider selling their shares in the market or doing a "bed and Pep". The latter involves selling the shares and then immediately buying them back into a Pep, allowing the dividend tax to be reclaimed. Some deals may also offer an option that doesn't include a special dividend (TSB's does not). It's worth taking advice.

YET another financial changeover. Insurer Norwich Union is considering a stock market flotation. That might mean a windfall for two million policy holders. To steal the Lottery's slogan: it really could be you next.