Tories offer £1.7bn for pensions

MICHAEL Howard has unveiled the Conservatives' pension plans with an ambitious £1.7bn package of tax breaks for savers. The Tory leader pledged to put more money into pensions for more than 10m people on low and middle incomes.

The announcement put clear blue water between the main parties on a vital policy area, with just over two weeks left before the General Election on 5 May.

The Tory scheme would boost the amount the Treasury pays into private and company pensions for low and basic rate taxpayers. And with half the workforce currently putting no money aside, it could persuade more people to save for their old age rather than rely on the State to pick up the bill.

For every £10 saved, a Tory Government would pay an extra £1 into the pot - increasing the existing incentive of £2.20 to £3.20. Young workers starting a pension now could see the value of their fund rise by more than £10,000 and generate an extra income of around £500 a year.

Howard revealed his policy after weeks of speculation that he was planning to cut income tax. The Tories have earmarked £4bn a year for tax cuts out of the £35bn annual savings they have identified. They have already pledged to spend £1.3bn giving pensioners a rebate on council tax worth up to £500.

After the £1.7bn pension announcement, Howard still has £ 1bn to play with before polling day. There was speculation last night that he may use it to offer further help to pensioners.

The pensions announcement caught Labour unawares. Ministers led by election co-ordinator Alan Milburn had prepared an attack on Tory plans but were unprepared to talk about pensions.

Howard said Labour had failed to address the issue of long-term savings. 'Britain today faces a pensions timebomb - a timebomb that threatens people's sense of security,' he said. 'For too long this issue has been swept under the carpet. It's been too difficult - and for some too frightening - even to think about. Doing nothing is not an option. Only by encouraging more people to save can we address their anxieties about their long-term future and give our economy a brighter future.'

He added: 'I believe in rewarding people who do the right thing and help themselves. Under our scheme people won't get something for nothing - they'll only get something out if they put something in. So to people paying basic rate tax in their late 20s, 30s and 40s, our message is simple: if you do the right thing, we will do the right thing by you; if you save, we will boost your savings; and if you help yourself, we will help you.'

He defended the decision not to use the cash to raise income tax thresholds, saying that the Tories felt it was 'in the best interests of this country to face up to this problem'.

The Tory pledge is aimed at repairing the damage done to the pensions industry by Gordon Brown's £5bn raid on dividends.

Contributions into occupational and private pensions are deducted before tax, which means that every pound paid gets relief from the Treasury. For standard-rate taxpayers the relief is worth 22p on top of every pound paid in.

The extra cash offered by the Tories would be paid to all those whose contributions earn relief at the lower and basic rates of income tax. It would not be given on any relief paid at the 40% rate. The measure would come into force in April next year. Most public sector workers, who belong to unfunded pension schemes such as nurses, would not benefit.

Labour claims to have identifieda 'black hole' in Tory spending plans and Transport Secretary Alistair Darling accused the Tories of 'conning' voters by offering money they did not have. 'Their policy is worthless because of that,' he said.

Labour faced fresh criticisms of its record on pensions. One in three firms fear Government policies could force them to axe their final salary pensions, said a report from the respected Association of Consulting Actuaries. It found that three in five firms feel the Pensions Act, introduced last November, will actually reduce the number of companies offering their workers a pension.