Howard offers £1.7bn to fill pensions black hole

Michael Howard tried to put Britain's "pensions timebomb" at the heart of the general election campaign by announcing that a Tory government would give £1.7bn in tax relief to encourage people to save for their retirement.

Michael Howard tried to put Britain's "pensions timebomb" at the heart of the general election campaign by announcing that a Tory government would give £1.7bn in tax relief to encourage people to save for their retirement.

The Tory leader took Labour by surprise by allocating almost half of the £4bn his party has earmarked for tax cuts to tackling the pensions crisis. He scrapped plans to increase tax thresholds for the low-paid and middle-income earners.

The Tory scheme would give 10 million working people an incentive to save. For every £100 they put into a company or private pension, the Government would add £10. The Tories said this could boost the retirement income of someone on average income by £10 a week.

The top-ups would apply only to people on the 10p in the pound starting rate of income tax and 22p basic rate. People on the 40p top rate already receive 40 per cent tax relief on their pension contributions. The plan would give basic rate taxpayers 32 per cent tax relief, compared to their current 22 per cent.

Mr Howard told reporters: "For so long this issue has been swept under the carpet. It's been difficult - and for some just too frightening - even to think about. But doing nothing is not an option."

The decision will disappoint many Conservatives, including Thatcherites, who were hoping for a more dramatic, vote-winning announcement about income tax. The party leadership did not deny predictions by the Institute for Fiscal Studies that the overall burden of taxation would rise under a Tory government. Mr Howard said: "We have had to make difficult choices about the priorities we face. We have come to the conclusion it is in Britain's best interests to face up to this pension time-bomb."

He confirmed there would be no initial cuts to income tax or national insurance contributions, saying critics "will have to accept there is no prospect of it in the first Budget".

The Tories will try to make pensions a big issue in the campaign. Although their private polls show many people do not blame the Government for the crisis, they hope to pin the blame on Gordon Brown, trying to puncture his reputation on the economy.

Labour said the Tories would not be able to implement their scheme because they would have a £14.1bn "black hole" in their finances by 2007-08. Alistair Darling, the Secretary of State for Transport said: "They don't have the £1.7bn to spend on pensions or anything else. If you don't have the money, you are conning people."

Vince Cable, Treasury spokesman for the Liberal Democrats, said: "The Tories say they will spend more on schools, hospitals and defence, cut taxes and balance budgets all at the same time. This is implausible and unachievable."

A taxing issue

By Andrew Grice

How would the Tories allocate their £4bn of tax cuts?

£1.3bn would be spent on halving the council tax bills of pensioners.

Yesterday £1.7bn was earmarked for tax relief, to encourage people to provide for their retirement. Plans for the remaining £1bn will be announced soon.

Is there really a "pensions timebomb" in Britain?

Yes. The interim report by the Pensions Commission said that 12 million people were not saving enough for their retirement, and highlighted a £57bn a year black hole by 2050 that would have to be filled by a combination of later retirement, higher taxes and additional saving. The proportion of household income being saved dropped from 9.4 per cent in 1997 to 5.6 per cent last year. And people are living longer. By 2050 there will be only half as many workers to support each pensioner than there are today.

Why have the Tories decided not to raise tax thresholds?

Until four weeks ago, the Tory leadership considered using most of their £4bn to take low-paid workers out of the tax net, and take some middle-income earners out of the top 40p-in-the-pound tax rate. They say the scheme could boost the annual income of people on average earnings by £500 a year when they retire.

Will some Tories be disappointed at yesterday's announcement?

Yes. Many Tories, already worried that the £4bn package was too limited, would have preferred a more traditional cut in income tax. They suspect that incentives to save are worthy and responsible but may not win many votes.

The Tories hope to get some credit for tackling a serious problem instead of offering people what might have been seen as a pre-election "bribe." After deciding to cut government borrowing by £8bn, they did not have enough money for a significant cut in income tax.

What is Labour saying about pensions?

Not much. It will announce its plans to tackle the shortfall after the Turner commission issues its final report. Last week, Labour appeared to rule out a move to compulsory pension contributions during the next parliament - which would look dangerously like a tax hike.