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May 21, 2006

Politicians’ Pension Plans

There’s one thing I’d like to know about this:

Leader of the House of Commons Jack Straw, recently demoted as Foreign Secretary, could retire next year at 60 and then enjoy a pension of £58,300 a year, equivalent to an investment in a private pension plan of more than £1.8m. The Prime Minister stands to gain most - an index-linked annual pension of two-thirds of his final annual salary of £184,000, guaranteeing a pension when he leaves office of £123,000 a year. For an individual in the private sector to achieve this they would have to invest almost £5m in an investment fund.

Chancellor Gordon Brown, who has been arguing that Britain cannot afford to increase the state pension, is sitting on pension savings paid for by the taxpayer equivalent to £1.75m. This will ensure he has a pension of at least £53,000 a year for life. If, as expected, he becomes Prime Minister after Blair leaves office, Brown will see his guaranteed pension entitlement more than double, even if he only serves a few months as leader. This month, The Observer revealed that, despite being stripped of many of his departmental responsibilities, Deputy Prime Minister John Prescott's pension pot is worth the equivalent of more than £1.5m.

No, not politicians feathering their nest: that’s just to be expected. They do things which benefit them, not us, that is simply the nature of the beast.

However, I seem to recall that there’s a limit on the tax breaks available to pension pots. If the assets are greater than 1.3 million, under newish rules brought in by Gordon Brown, then the favourable tax treatment is withdrawn. At least roughly speaking, I think that’s true.

So, these Ministers do seem to have pension pots worth more than 1.3 million. Do they still get the preferential tax treatment or not?

May 21, 2006 in Your Tax Money at Work | Permalink


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The 'pot' is a notional thing some accountancy firm (probably Grant Thornton, but I've not read the article) has worked out on the basis of the annual payments.

Posted by: Matthew | May 21, 2006 10:01:01 AM

Amazing though it may seem, part of the rationale for these generous pension plans for our retiring political leaders is to reduce incentives to engage in corruption and sleaze during their illustrious political careers.

However, as with so much else in Blair's administration, the good intentions may be there but consequences don't quite seem to follow through. The chairman of the Committee on Standards in Public Life has recently commented:

"Sir Alistair Graham, appointed by the prime minister to oversee politicians’ behaviour, has criticised Blair for treating standards as a 'minor issue, not worthy of serious consideration' and says the prime minister now faces repercussions for failing to give the issue sufficient emphasis. 'I think it’s a major error of judgment,' he said this weekend in an interview in The Sunday Times."

Take a case in today's news:

"A Home Office official has been suspended after a newspaper said an immigration officer tried to have a relationship with an asylum seeker. The Observer said an officer at Lunar House in Croydon had targeted an 18-year-old Zimbabwean."

When it came recently to a not entirely dissimilar context and the extraordinary revelations about Serial Groper and his diary secretary, Blair held that to be "a private matter". Needless to say, we can be sure nothing unusual will be happening to Serial Groper's pension anytime soon whatever happens to the erstwhile diary secretary and the Home Office official dealing with the targeted asylum seeker has been suspended pending investigations. Just the usual case of: Dont' do as we do, do as we say.

Posted by: Bob B | May 21, 2006 10:06:13 AM

The pot is notional because there is no fund behind it: it is paid out of tax. The notional value is based on the current cost of annuities. An index-linked annuity paying to a widow for a non-smoker retiring at 60 is about 3.5%: £100,000 pot pays an annual pension of £3500.

Annuity rates change. They are stunningly low at the moment thanks to the hitherto loose monetary policy. It's tightening now, so expect annuity rates to rise (and the values of notional pots to fall).

Yes, the punitive tax charges are applied to notional pots as well as actual ones. Yes, the ministers will be hit as well.


Tim adds: Katie: Do you have a link to anything that shows those last two statements? That notional pots are hit and that Ministers will be? I’d be fascinated to see that.

Which leads to another thought. If notional ones are, and as you say annuity rates yo yo around, then could people be hit with a tax one year, at low such rates, only to find a couple of years later, as rates rise, that they should not have been?

Posted by: Kay Tie | May 21, 2006 10:34:16 AM

Nothing new about piggies awarding themselves a bigger & better sty! After all these little piggies have made such a contribution to the betterment of all our lives.

As for annuity rates - their 2 main drivers are interest rates & in the case of the UK, English Standard Life Tables No.14. However, another reason annuities are so expensive at the moment are the lorry load of new taxes introduced by Tax n Waste Brown ... but of course, his pension wont suffer because its the taxpayer that is funding his particular pot!

Posted by: Mr Free Market | May 21, 2006 11:11:36 AM

I made a mistake: the Revenue sets the deemed value of a final-salary scheme fund at 20 times the annual pension, not on prevailing actuarial rates. There are transitional rules to protect a notional pot that has already accumulated more than the lifetime limit.

Ministers, having final salary schemes, are in the same boat as everyone else on these schemes. Nothing the pension legislation I have seen gives immunity to ministers (or any other civil servants). You might agree that transition protection (available to everyone) was somewhat of a higher priority than it might otherwise have been..


Posted by: Kay Tie | May 21, 2006 5:12:25 PM

K - I'm not so sure you're right. Not everyone is in the same boat with these schemes, witness the government climbdown over Judges' pensions - which now have a specific exemption from the tax rules on their notional pension pots.

I don't know the situation with politicians' pensions but it would be unwise to assume that final salary pensions are all treated equally - because they're not.

Posted by: HJHJ | May 22, 2006 8:04:57 AM

the problem of pension ,actully,is very annoying .but there is more funny thing in life .therefore ,please take care of your own life and pay more atteition to your own business.

Posted by: frank | May 22, 2006 10:12:41 AM