The Chancellor failed to please many with his Autumn Statement on Wednesday. But behind the headlines, what was inside the political posturing which may affect your personal finances? To be honest, there wasn’t much that hadn’t already been leaked by the coalition’s army of busy spin doctors, but using the event as a timely spur to take stock of your finances is a good idea.
The key change announced on Wednesday affecting savers is the increase in the amount of cash you can put into an Individual Savings Account (ISA). That will climb to £11,520 next April.
However, only half the total, £5,760, can be put into cash savings with the rest of the allowance being taken with equity investments. It means the Chancellor missed the opportunity to encourage savers to put more away.
If he had increased the amount of cash savings allowed in an ISA to the total allowance of £11,520 that would have served as a powerful tool in the Government’s efforts to encourage savers and, ultimately, help those putting cash away for a new home.
Graham Beale, chief executive of Nationwide, said: “Increasing the cash ISA limit would have given a much-needed boost to savers and the many first-time buyers who use ISAs to save for their deposit.”
If the Chancellor had also made the rules more flexible to allow money to be switched freely between investments and savings in an ISA, that would have improved their attraction to cautious folk.
At present one is only allowed to switch cash savings in an ISA to investments, not the other way. That’s a major disincentive to those who are still wary about dipping a toe into the presently wildly fluctuating stock markets.
However, the increase in the amount you can put away into an ISA is to be cheered. Remember the main advantage is that all gains are tax-free. So the news should spur savers onto ensuring that their nest-eggs are as tax-efficient as possible.
The Chancellor cut the tax relief on pension savings by a fifth, reducing the amount people can put into a pension each year to £40,000, from the present £50,000 level. However, the reduction doesn’t come in until 2014, which in effect gives high-earners two more chances to boost their retirement income by making the most of the 2012-13 and 2013-14 allowances. The lifetime limit – the total amount you can put into your pension pot overall – will also fall in 2014, from £1.5m to £1.25m.
However, although it’s easy to assume that the move will only hit a few high-earners, the reduction could actually cause problems in pension planning for many.
Though the £40,000 level is still pretty generous, middle-earners could be hit. Anyone who has been a member of a workplace pension scheme for some years and gets a decent pay rise or a promotion could find that he or she ends up with an unexpected tax bill for breaching the annual allowance.
What the move does mean for anyone planning ahead for retirement is the importance of ensuring that whatever you do doesn’t lead to an extra tax bill. By the same token, maybe you need to boost the amount of cash you’re locking away for your future needs. Jamie Jenkins, head of workplace strategy at Standard Life, said: “It’s unfortunate that the Government has taken the decision to reduce the annual and lifetime allowance for pension contributions for the second time in three years. But it’s helpful the implementation is not immediate, thereby giving people time to plan.”
The increase in the amount of money you can put in a tax-free ISA to a limit of £11,520 next April is good news. All the money can be put into equities.
But the Chancellor’s surprise announcement that risky AIM shares will be allowed to be put in an ISA in the future split commentators.
On the one hand, encouraging the unwary to invest in highly volatile Aim shares is unwise. Many ISA investors are still fairly financially unsophisticated and being exposed to an Aim company could be a risk too far for them.
On the other hand, there’s little logic in excluding Aim shares from ISAs, according to Gavin Oldham, chief executive of The Share Centre.
“There is simply no logic in keeping Aim shares outside an ISA portfolio,” he says.
“Investors are already able to get access to Aim through a SIPP, and there are many Aim-listed stocks that circumvent these restrictions through an international dual listing.
“Investors can at resent put their ISA allowance in small-cap shares, often with the same risk profile and exhibiting the similar levels of volatility as Aim stocks.”
The lesson is therefore to be fully aware of the risks attached to any investment you make and not assume that, just because it’s in an ISA wrapper, that it is somehow less risky.
There was no new help for homeowners announced in the Autmn Statement. However, the Support for Mortgage Interest – which allows struggling owners in effect to take a repayment holiday for a short while – has been extended for another two years.
For anyone in a sizeable property thinking about moving, the fact that the Chancellor resisted Lib Dem calls for a so-called mansion tax on high-value homes is good news.
But the issue is unlikely to go away.A higher rate of stamp duty for more expensive homes could still come in, so the lack of anything happening this time gives property owners what might be a brief opportunity to move and not face a larger land-tax bill.
Bills and benefits
Motorists will have cheered the news that the Government has scrapped the planned 3p increase in the cost of petrol from January. It is estimated to save the average driver £80 per year on filling up his or her car. However, the rise is still planned for September. That prompted Peter Carroll, founder of the FairFuelUK movement, to say: “We welcome the scrapping of the rise in January. However, it’s like going to a doctor who says the good news is, I’m not going to make you any more ill.”
But there was bad news for anyone claiming benefits as the Chancellor revealed that most will rise by only 1 per cent per year which is far below the current rate of inflation, at 2.7 per cent. That means, in real terms, any extra benefit will be worth less, buying less food or clothes.
Gillian Guy, chief executive at Citizens Advice, said: “Holding down benefit increases to 1 per cent is better than a total freeze, which would have been disastrous for people on the lowest incomes already having to spend a higher proportion of their income on essentials when rents, food and heating bills are all rocketing.
“But the Government can’t keep hitting the same people over and over again.
“Below-inflation benefit increases hurt working families in low-paid jobs who have already been hit by wage freezes and cuts in working hours,” she said.
In short, the Autumn Statement’s biggest success will be in pushing more people over that financial cliff.