By GRAHAM FROST 06/12/2006
Today’s Pre-Budget Report contained three key announcements from our point of view:
- ISAs are here to stay, albeit with a few tweaks.
- Those wishing to draw an income from their pension beyond age 75, rather than buy an annuity, could have their fund prohibitively taxed when they die.
- The tax benefits of buying life cover within a pension (Pension Term Assurance) might be curtailed.
Elsewhere, there was little to get very excited about. The 2007/08 income tax allowances will rise inline with inflation as usual, as will fuel tax from midnight tonight. While the latter offers some respite for motorists (it was feared fuel tax increases would be in excess of inflation following the Stern Report) air travellers are less fortunate as Air Passenger Duty is to double from next February. Pregnant mothers will benefit from receiving Child Benefit from week 29 of the pregnancy, rather than birth, although this won’t take effect until April 2009. A minor investment point is that Stamp Duty Reserve Tax will no longer apply to foreign Exchange Traded Funds from 1 February 2007, making them a little more attractive to UK investors.
| "The ISA announcement is mostly good news..." |
The ISA announcement is mostly good news, with changes likely to take effect from 6 April 2007. The Chancellor has committed to them becoming a permanent fixture with an annual allowance of at least £7,000, while the distinction between Mini and Maxi ISAs will be removed and PEPs will be brought into the ISA wrapper. The latter could affect you if you have un-invested cash in your PEP as, unlike ISAs, interest on the PEP cash is only taxed if more than £180 of interest is withdrawn each year. Under ISAs all this interest is subject to a flat 20% tax charge.
It will also be possible to move Cash ISAs into Equity ISAs, but worryingly there’s been no hint of the reverse being allowed. This is a fundamental flaw as while the permanence of ISAs makes them more attractive for long term financial planning, it’s natural to move away from equities and into cash later in life when capital preservation usually takes precedence over growth. I suspect Gordon Brown is not keen on this because the tax relief on Cash ISAs costs the Treasury more than those on Equities ISAs, so he has a vested interest in pushing savers towards equities.
Contrary to most expectations, Brown did not scrap the ability to continue drawing an income from your pension after your 75 th birthday (referred to as an ‘Alternatively Secured Pension’ (ASP)). However, he’s made this route prohibitive if your plan is to pass the pension fund to beneficiaries when you die, by taxing the fund up to 70% on death (perhaps more if IHT is taken into account) . From age 75 you will also need to draw an annual income of between 65% - 90% of the comparable annuity income. This is yet another pension u-turn which, following the residential property within pensions debacle, suggests the current Government has little sympathy for those trying to accumulate then manage a decent sized retirement pot. Unsurprisingly, ASP doesn’t affect MPs and civil servants as they enjoy lucrative final salary pensions which are funded by taxpayers and not dependent upon investment performance.
| " The most surprising announcement concerns life cover within pensions..." |
Perhaps the most surprising announcement concerns life cover within pensions. Having eased the rules allowing life cover to be purchased within pensions on 6 April this year, the Treasury has now suggested the tax benefits may be curtailed, or even removed on policies taken out from today. Pension Term Assurance (PTA) has proved a popular way to buy life cover, as the premiums benefit from income tax relief. Restricting or removing this benefit so soon suggests a major lack of foresight by those responsible for introducing the rule changes in the first place. Without the benefit of tax relief the premiums on these policies tend to be more expensive than conventional Term Assurance, so we suggest avoiding PTA until the Treasury clarifies the position.
So much for pensions simplification!
All in all, a fairly neutral budget for the majority. However, those who were planning to use ASP have a right to feel mightily aggrieved and misled by the Chancellor.