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Budget preview: Growing fear of stealth tax raid on pension savings

By Exeter Express and Echo  |  Posted: March 14, 2014

Tim Walker image

Tim Walker, of Brewin Dolphin in Exeter

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Pensions and tax experts at Brewin Dolphin have been looking ahead to next week’s Budget with an eye on how savers and investors could be affected when the Chancellor delivers his statement on Wednesday, March 19.

Tim Walker, divisional director and head of the Exeter office of Brewin Dolphin, said: “Here in the Westcountry we call for continued support for ISAs. These are a vital investment vehicle for many of our clients, particularly as they approach retirement.

“We would welcome a commitment from the Government to ISAs as a core long term savings vehicle for UK citizens. Speculation is building that there may be changes here and the uncertainty is most unwelcome and destabilising at a time when every encouragement should be given to those seeking to ensure their long term financial security.

“Any restrictions on ISA savings will drive the spare savings flow into the already overheated property market, making house prices even less affordable.”

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A key focus of this year’s budget is likely to be pensions and the increasing demand for reform in the annuity market.

Nick Fitzgerald, head of financial planning at Brewin Dolphin, said: “We are always busy with pensions in the approach to the end of the financial year, but this year we have not noticed a discernible increase above the usual, of clients rushing to top up their pension pots.

“The world of pensions is increasingly less certain with a loss of trust in the stability of the regime. Over recent years we have seen a constant nibbling away at the incentives to save; reducing lifetime allowances; a fear of means testing for the state pension; investments in pension funds no longer receiving dividend tax credits – which were a huge incentive in the past; and now more and more pension savers are paying higher rate tax in retirement. Altogether, these changes are making ISAs a more attractive long term savings vehicle.

“There is a growing fear that pension savings are an easy target for stealth taxes. A commitment from the government that pension reliefs will not be tinkered with for the lifetime of the next Parliament would help restore trust, especially in the face of Labour’s intention to restrict higher rate tax relief - costing pension savers an estimated £1 billion per annum. If we are to avoid seeing further erosion of pensions, we must regain confidence in the Government’s intentions on incentives and also push hard for reform of the annuity market.”

Members of the Brewin Dolphin team have given their key predictions ahead of next week’s Budget:

PENSIONS

Richard Harwood, divisional director financial planning, predicts:

• Restrictions on some of the more esoteric investments that can be held in pension schemes.

• Possible new limits to pension tax relief that may hit the ‘squeezed middle’.

• Announcement that small pension pots – say <£40k – will no longer be forced to buy an annuity.

“The government has put in place measures to further limit tax reliefs to those thought of as wealthy,” said Richard. “It would seem that there is political will to restrict tax reliefs so the limits may be tightened further in future, but there is a danger that these will again hit the ‘squeezed middle’.”

TAX & NI

Guy Foster, head of portfolio strategy, predicts:

• A clear political and economic rationale exists for raising the national minimum wage beyond the three per cent recommended by the low pay commission, although the likely casualty of such a move might be further advances in the personal allowance.

• The distinction between income tax and NI is now so blurred as to be meaningless and this nettle needs to be grasped.

Guy said: “Mr Osborne has been quite clear about the type of Budget he is planning. Large scale giveaways aren't justified by either the political or economic cycle this year.

“Even as inflation falls, however, the accumulated decline in real incomes from rising prices and stubbornly inert wages remains a hindrance to economic prospects. A big issue therefore is what he may do for the low paid.”

VCT & EIS

Mr Harwood predicts:

• Possible increase in investment limits for Venture Capital Trusts and Enterprise Investment Schemes.

• Further tweaking of the rules to ensure that eligible investments are not just tax-relief schemes.

“Increasingly EISs and VCTs are providing funding for businesses that would traditionally be the domain of banks,” he said. “But we would not be surprised if there was further tweaking of the rules on what investments are approved in order to ensure that there is true risk within the plans and that they are not just schemes to maximise tax reliefs.”

TAX AVOIDANCE

Mr Harwood predicts: “This continues to be a priority and any victory in court for HMRC is strongly publicised, so we should expect the closure of perceived loopholes to be highlighted.”

CAPITAL GAINS TAX REFORM

Mr Burgeman predicts: “Greater simplification is required over CGT, especially as savers are now being taxed on inflation since the indexation of book costs was removed. How long before we will see fair differentiation in the taxation of short term speculation and long term investment?”

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