Beating Mr Brown's nest-egg robbery

Last year's Budget sneaked in a stealth tax on pensioner savers of the most modest means.
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Pensioners who have a few investments but who do not pay tax were dealt a hefty blow by the Chancellor in the April 1999 Budget. It became no longer possible to claim the tax back on share dividends, a by-product of the Government's abolition of advanced corporation tax. This change has left thousands of pensioners of modest means worse off.

Pensioners who have a few investments but who do not pay tax were dealt a hefty blow by the Chancellor in the April 1999 Budget. It became no longer possible to claim the tax back on share dividends, a by-product of the Government's abolition of advanced corporation tax. This change has left thousands of pensioners of modest means worse off.

The position before 5 April 1999 was that each dividend paid by a company came with a tax credit which satisfied the shareholders' liability to income tax, for basic- and lower-rate taxpayers. Non-taxpayers were able to reclaim the tax credit in cash. Higher-rate taxpayers could use the credit against their income tax liability.

That changed from 6 April 1999. Dividends still came with a tax credit, but non-taxpaying individuals would no longer be able to reclaim this tax credit in cash. The credit could be used only to satisfy tax liabilities. And if you don't have any tax liabilities, tough.

The changes didn't have any impact on basic-, lower- or higher-rate taxpayers. Bizarrely, the change did hit thousands of pensioners who had picked up shares in the privatisations of the Eighties, or the conversion of the building societies in the Nineties. These people suffered a loss of income, often hundreds of pounds a year, extremely damaging to pensioners on a tight budget.

In many cases the husband paid some tax and the wife was the non-taxpayer with shares, an investment trust or a unit trust in her name. If you're a non-taxpayer you lose the 10 per cent tax credit on UK dividends. It's solely a dividend issue. Investments paying interest aren't affected.

During the period leading up the the fateful Budget decision, Help the Aged campaigned hard to persuade the Chancellor to allow non-taxpayers to collect the tax. Now the group is trying to get the pension linked to average wages.

James Dalby of Bates Investment Services (01132 955955) says: "It's a stealth tax. My clients are fairly normal, not on the bread-line but by no means wealthy, with up to £30,000 invested, often in shares and unit trusts. No tax credits can mean they're now poorer to the tune of £180 to £200 a year.

"If you're earning, that doesn't sound too bad. But if you are on a limited income and having to be a bit careful, it's a lot of money. Some hope the Government will relent but I doubt it. Its a real nuisance to many people."

Ironically, thousands of these pensioners with low net worth don't go to Independent Financial Advisers (IFAs) - they just participated in a few flotations off their own bat.

Roy Jenkinson, a retired accountant, and his wife Mary, both 66, live outside Blackpool and with their IFA, Bath-based Chase de Vere (01225 469371) decided to take advantage of Mary's non-taxpaying status to build up a portfolio.

Mr Jenkinson says: "The loss of tax credits was a considerable blow. I suppose we've lost about £250 a year which is not nothing. Since l999 we've had to re-organise Mary's savings into growth unit trusts when really we want income at our age."

"We even find banks - Nat West in particular - unsympathetic to giving us half net of tax and half gross on the income from savings accounts."

David Lakin of Manor House Financial Advisers in Leicester (0116 242 5511) says: "My clients don't grasp what the Chancellor has done. What we do is draw the loss to their attention and tell them about alternative methods of savings where they won't miss out." Andrew Arthur, of the IFA firm Rosemount (01708 742777), was asked by one client, the son of a 90-year-old lady, to take a look at her finances. "She has a bit of savings in flotations and the basic state pension,' says Mr Arthur. "She has been paying tax on her building society deposits and on her share dividends for years. The Revenue only let you claim tax rebates for six years back, so we stopped her paying tax on the building society interest with the R85 and she got a nice fat cheque. But of course we could do nothing about the tax from her dividends.

"We decided to put her share money into a with-profits bond, which ironically is not tax-efficient as you can't get the tax back either, but the net interest is so good at 10 per cent that we thought it was a good choice. If she'd been more inclined to take risks we'd have gone for an income-orientated equity Isa and unit trusts."

So what's a low-income pensioner to do? It is worth looking at your savings and asking whether they are tax-efficient, and making changes when they aren't. People who might not feel up to it can contact IFA Promotion (020 7833 3131) for a list of three local IFAs. A good IFA can often make a beneficial difference to your savings. In this instance he can steer them out of high-yield shares into something more tax-efficient like an Isa, or at least channel funds into growth or low-dividend shares.

Janine Starke of financial advisers Chase de Vere says: "The only obvious way out is to put all savings into a unit or investment trust, or even shares wrapped in an Isa tax shield.With an Isa, non-taxpaying pensioners are allowed to claim back a 10 per cent tax credit.

"But from 2004 non-taxpayers will lose the right to claim the remaining 10 per cent tax on Isas (and Peps). The capital gains tax waiver continues, forcing a switch for the non-taxpayer on investment for growth rather than income."

Another way to tackle the problem is to choose investments only where you can claim the tax back, such as interest-bearing deposits. Obviously there are bank and building society deposits.

There is also convertible loan stock which starts out as, in effect, a bank deposit and you decide when the investment can be turned into shares. Well-timed, this could be a tax-efficient way of dealing with the non-repayable tax problem.

There are also foreign investments where you can get the tax back. And there are Permanent Interest-Bearing Shares (Pibs) which mean you can get the interest back. Building societies raise funds with Pibs, they offer a high yield, are quoted in newspapers, can be traded and have a fluctuating market worth rather like shares. These fluctuations can be offputting for investors seeking security.

A great favourite among IFAs is corporate bond funds, such as the M & G Corporate Bond Fund, because they are high-yielding and you can reclaim 20 per cent of the tax back. James Dalby says: "We prefer them to Pibs because there is the portfolio aspect and the spread of risk. I wouldn't recommend the actual bonds - too high-risk."

With either investment, the capital involved is at risk if stock markets do badly. So the message isn't entirely gloomy. By taking expert advice or doing a little homework, you can mollify the damage that Gordon Brown did to your retirement nestegg.

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