By TIM STALKARTT 10/06/2010
The Con-Lib coalition has announced its first budget will be held on 22nd June 2010. The impact of the changes announced will be far reaching and affect which products and tax wrappers are most suitable for investors.
Compulsory Annuities
The announcement to end compulsory annuities is bewildering. Despite both the present government and previous one promising to end these there is actually no such thing. Compulsory annuities were abolished in April 2006, ‘A’ Day. Investors can take a form of income draw down through an Alternatively Secured Pension (ASP). The issue however, is that in essence the fund is lost on death as there is an 82% tax charge (and you thought 50% was high!) and that is if the trustees will make an unauthorized payment – many will not.
We think the government might be saying there won’t be compulsory “Crystallisation” at 75 – pension-speak for taking benefits – which could be a good thing – BUT it all depends on the treatment of death benefits – in short – we’ll have to wait and see.
Pension contributions
The rules on pensions have become more complex and there are rumours spreading that the higher rate relief will be reduced further or a cap of £30,000 will be put onto pension contributions. The latter would be a big mistake, as it will leave thousands unable to fund their pensions to meet their requirements in retirement, likewise we do not believe the higher rate relief will be removed entirely. However, the caps could be introduced to further restrict higher rate relief so investors who are looking to make use of their pension allowance this year should consider bringing it forward.
Capital gains tax
The announcement that CGT will rise close to an individual’s marginal rate of income tax will have an impact on the relative merits of various wrappers. Insurance bonds could be the biggest beneficiaries as they convert capital gains into income and suffered most when the rate dropped to 18%. Higher rate tax payers may wish to use them to defer an income to a time when they are paying a lower level of income tax. It’s a complex equation however – so it is definitely worth asking us for advice.
General tip
We think VAT will only go one way, so it makes sense to make major purchases before the budget – and as a tank of petrol now counts as a major purchase make a note to fill up on 21 June!
If there is anything you wish to discuss please call one of our Investment Professionals on 020 7189 9999.