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Budget 2015 – Tish and Fiddlesticks

Well, nobody was ever expecting that this would be anything other than a pre-election budget with a fairly predictable round of sweeteners and softeners for the wavering vote. I mean, if you were facing re-election with your back to the electoral wall and with Nigel Farage moving in on you, wouldn’t you have done the same as George Osborne?

And, up to a point, the Chancellor delivered on the expectations. He promised us a rise in the tax-free earnings threshold to £10,800, with a further increase to £11,000 next year. He raised the higher rate threshold too, and he promised another big crackdown on tax avoiders/evaders, including those who use certain hitherto legal routes for distributing their wealth to maximum advantage. “Deeds of Variation”, anyone?

The Chancellor gave us the glad news about enhancements to the Northern Powerhouse programme – including new freedoms for the self-regulating Manchester authority to retain all its business taxes for itself. Okay, he did seem to make a momentary slip when he said that the next civic entity to follow Manchester’s lead would be Cambridge, which isn’t really in the north at all, you know.

And so on, and so on. There was a quick sop to White Van Man with the abolition of the Class 2 national insurance stamp for the self-employed, but at £2.75 a week the spare change won’t even buy them a cappuccino, much less a penny-off pint of ale at the new reduced duty rate. (Bottoms up, Mr Farage.)

Then there was the slightly odd calculation about the freezing of the fuel tax escalator, which will see the duty on petrol staying at 57.95 pence per litre after next September’s scheduled increase. According to the Chancellor, the freeze (since 2011) has been saving car owners a tenner on every tankful. My maths may be a bit rusty, but if a typical tankful is 60 litres, then Mr Osborne must be working on an inflation rate of well over 4% to make his calculations work. I think we should be told.

The End of Paper Tax Assessment Forms

And there was – with all credit to the Chancellor – that commitment to abolish the hated annual paper tax return, which has probably caused more anguish and depression than most other forms over the years. The bad news, however, is that consumers will still need to do the online version – which, with its baffling array of User IDs, two-part passwords and multi-sectional specificities, is quite capable of crashing some people’s self-confidence completely.

And how are the computer-less, the weak-willed, the paranoiacs and the organisationally challenged to cope with HMRC’s stern digital interface, especially since your tax is worked out for you and you can’t challenge it? The Government says that automation will mean that taxpayers spend just 10 minutes a year on their self-assessment. We shall have to see how that works out in practice.


One thing that will certainly change for ISA investors is the abolition of the old rule that the money you put into your account can’t be withdrawn again, even on a short-term basis, without diminishing your ability to put the whole of your entitlement back in to as to leave yourself maximising your tax free allowance during the tax year. Abolishing this antiquated restriction was, as George put it, an act of trust toward the common man. (Oh, all right, perhaps he didn’t choose quite that phrase, but you get my drift.)

But what did the proposal mean in practice? It was actually a bit hard to say. Was the Chancellor saying that we might be able to carry forward our unused entitlements from one year to another? For a while it seemed momentarily possible – and it would have made a lot of HNW investors very happy. But it’s doubtful whether the cold light of day will reveal anything quite so generous. Or so liable to distort the pattern of savings into other tax-efficient vehicles. Quite apart from the fact that very few savers have the cash available to take maximum advantage of the present £15,000 ISA allowance on any kind of a regular basis. (Or 15,240, as it will soon become.)

There was more interest in the idea of a new ISA scheme for first-time homebuyers, which the Chancellor said will tip in another £50 every time that a buyer invests £200. I don’t know whether Mr Osborne’s advisers have costed that one correctly, but the potential government input may turn out to be pretty huge in cash terms if every new home buyer decides to take advantage of it. (And why wouldn’t they, if it turns out to be easy as it sounds?)

£1,000 of Investment Earnings to be Tax-Free

The Chancellor was on safer ground with his plan to allow savers the first £1,000 of returns on their investments free of tax. It was not going to cost him anything like as much as we might have thought. Well, certainly not the £200 that you might have imagined. The task of calculating how big a cash deposit pot you’d need to make £1,000 in interest hardly bears thinking about – it’s probably in the £75,000-£100,000 range, and if you’ve got that kind of cash why wouldn’t you have ISA’d it?

Okay, there are  higher-rate returns to be had out there, but unless you’re a pensioner bond buyer they’re generally tied up with at least some sort of  risk and you’re probably astute enough to know your way around the tax rules anyway. It’ll be interesting to see how far the new 0% rate on that £1,000 impacts on savers’ decisions to choose cash rather than equity risk. I’m guessing not at all.

Life time Pension Savings Cap – A boon for Alternative Investments?

There was more predictable gloom for HNW and higher-earning savers in the long-trailed announcement that the lifetime contributions cap was to be reduced once again from £1.25 million to £1 million, with effect from next year.

Goodness knows, it’s been tough enough for investors who’ve already seen the cap brought down from £1.5 million last April and 1.8 million in 2011. And, as far as the naked eye could see, there was no sign that the Chancellor had relented on the idea of whether the cap should be based on the value of the pension fund, rather than its value at the time the contributions had been made. The only concession was that the limit would be index-linked after 2018.

What does it mean for savers? Industry analysts reckon that £1 million of cash in your pension fund won’t earn you more than £20,000 a year as an annuity. Or, in other words, if you’ve got your eyes set on more than a £20,000 annual income in retirement (beyond the state benefits), you’re going to be forced to pay the punitive 55% higher rate after all.

The ruling will also impact on many public sector workers, including doctors and senior civil servants, who have employer pension arrangements that will automatically put them in breach of the £1 million pension cap.

What will they do about it? Find some other way of saving for their retirements, of course. Great news for providers of alternative investments like VCTs and EIS funds.

 A Second-hand Annuities Market?

The Chancellor got himself some welcome publicity last weekend with the brave announcement that those pensioners who’ve already committed themselves to annuities will be given a chance to rescue themselves from the jaws of the monster.

“The Chancellor has announced that the government will extend its pension freedoms to around 5 million people who have already bought an annuity,” the statement had begun. “From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to sell the income they receive from their annuity without unwinding the original annuity contract….. Pensioners will then have the freedom to use that capital as they want – just as those who reach retirement with a pension pot can do under the pension freedoms announced in Budget 2014. They can either take it as a lump sum, or place it into drawdown to use the proceeds more gradually”.

The Pensions Industry Sucks Its Teeth

Tish and pshaah, the industry’s response seemed to say. To sell an existing annuities contract for cash, you’re going to have to find a buyer for it. Which won’t be easy, given that its financial outcome, and therefore its value, depends entirely on how long you’re likely to live. Are annuity holders looking for a conversion really going to have to bare every detail of their health to the prospective buyers, like slaves in a marketplace?

Again, I think we should be told. And don’t let’s run away with the idea that pensions will get full cash value on their annuities – in truth, an 80% valuation on the ‘net asset value’ is more likely.

But Joanne Segars, the Chief Executive of the National Association of Pension Funds, put it a little more subtly than me. “It’s clear to see how this fits with this Government’s agenda for pensions,” she said, “but what is less clear is how savers will be protected. A full consultation will be essential….[which] would need to look at how the buy-back price of an annuity would be calculated so people selling their annuity could be assured of good value; and also consider a prescribed process for introducing buyers and sellers to avoid excess costs, which would inevitably be carried by the consumer.”


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