A gloomy economic prospect ahead for Labour's third term?

Action on pension provision is viewed as the key issue of Labour's third term in office, but this term has had a rather depressing start. A faltering, some argue a rapidly deteriorating economy doesn't auger well for improved savings culture and comfortable retirement.

The bad news has piled up since Election Day. A report from City banker ABN Amro says the UK economy is set for a dramatic decline, with the warning that: "weaker consumer spending will trigger a chain reaction of higher unemployment and tumbling house prices, with an estimated 500,000 jobs to be lost from retail, manufacturing and construction sectors by 2008."

Consumer demand has been severely dented by rising mortgage bills and the prospect of a house price downturn (prices are predicted to drop by as much as 10% by the end of 2007). The British Retail Consortium has reported the worst year-on-year fall in retail sales (April, down by 1.3%) in six years. Official figures show that manufacturing output slumped by 1.6% in March, the worst monthly fall for three years.

Personal bankruptcy is at its highest level for 30 years (13,229 cases in England Wales for 2005's first quarter), figures show a sharp rise in court actions for home repossession, and the Bank of England has now revised the economys growth rate down to 2.6%.

Not the best way to kick off a third term, then; consumers who have generated 80% of all economic growth since 1997 (and amassed more than £1 trillion of household debt in the process) have apparently run out of steam, noted HSBC economist John Butler.

What's more, it is now very likely they will not have the option of working longer hours, thus (hopefully) earning more money to regenerate the spending habit, let alone the saving one. The European Parliament is confidently expected to deprive the UK of its opt-out clause in the EU's working hours regulations (48 hours maximum per week).

Council tax costs set to soar in England

Is there anything to look forward to? Well, base rate is unlikely to increase in the months ahead; in fact the Bank of England could lower it to stimulate spending. On the other hand, many homeowners (7 million plus estimated) will see their council tax increase by between £400-800 (depending on residential area) once the current rebanding or revaluation exercise is completed.

Wales is already paying a rebanded council tax because it started the process two years ago; England's dwellers will feel the pinch come April 2007.

How will pensions and savings shine out in such a gloomy financial scenario? There's been the recent introduction of stakeholder plans and Mr Brown has let us keep our ISA allowance of up to £7,000 each tax year until 2010. The big pensions event, though, promises to be A-day, on 6th April 2006.

On that date the Inland Revenue will implement amendments; the varying rules for different pension schemes will be replaced by a single regulatory framework for all. Amongst the changes will be the ability to put unlimited amounts into a scheme each year, gaining tax relief on contributions, provided a lifetime pension limit of £1.5 million is not exceeded. (If it is, a recovery tax, charged at 55%, will swing into action.)

From A-Day all pension plans will allow the withdrawal of 25% of the fund as tax-free cash and the holding of residential property, including buy-to-lets, will be deemed part of pension schemes. There will be no compulsion to buy an annuity and transfer of annuities from one provider to another will be allowed (albeit difficult to imagine in practice).

One consequence of this is that pension schemes are likely to get bigger and the tax relief more expensive for the Government. How long into the third term before a budget brings reduced tax breaks, maybe restricting them to basic rate tax?

17 May 2005 © Moneyextra.com

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