Julian Knight: Savers should not ignore tax-free equities
Sunday 18 March 2012
Allow people to put all their individual savings account allowance into cash, says the Nationwide. At present people can put a maximum of 50 per cent of their allowance into cash; the rest has to go into equities or remain unused. Now, putting aside Nationwide's obvious self interest here, as one of the UK's biggest cash ISA providers, I have some sympathy for this idea.
Savers have been systematically devastated over the past five years by falsely low interest rates. There has been a transfer of money from savers to debtors on an unprecedented scale. Against such a backdrop any scrap of comfort is welcome. But then again isn't £5,340 a year in ISAs enough? Not to mention the tax-free savings bonds from National Savings which come to market on a regular basis allowing up to £30,000 to be sheltered. What's more, those who shouldn't pay tax, because they earn less than the personal allowance threshold, can simply sign a docket at their bank or building society in order to avoid it.
The ISA allowance itself is guaranteed by the current Government to go up with inflation. In short there are lots of opportunities for people to shield their savings from tax. What's more, should people have such a large amount in cash? Even with the tax break many accounts don't come anywhere near keeping pace with inflation, so unless it is your rainy day fund or you are nearing a point in your life when you need the money intact you'd be best looking to get your money working harder for you, which usually means bond funds or equities.
Of course, people wouldn't be forced into cash rather than equities but the preferential treatment given to equities in the ISA system at least points people in potentially the right direction. I'd keep things as they are.
100-year bond suggests false pride
A generation ago UK government debt was firmly in the second division as far as many international investors were concerned. Perceived economic weakness and the UK's precarious status as a dwindling oil exporter meant our debt was a poor relation of Germany and the US.
Nowadays, despite the fact that the Government is issuing debt like confetti, it seems we can't do any wrong; now the Chancellor wants to pilot 100-year and even perpetual government debt (in the latter case the capital never gets repaid). And it seems with insurers and other financial institutions desperate for so-called safe investments to satisfy stricter solvency requirements there may be the odd taker.
But, really, 100-year bonds at historically low rates of interest, when you factor inflation (as you must) into the equation look like a nailed-on means of losing money, a rank bad investment along with bonds issued in the world wars. This seems to be more about the Chancellor breast-beating about his stewardship of the economy and the genuine confidence of investors. What's the phrase about pride coming before a fall?
No dice, Balls
The battle over potential reform of pensions tax relief continues to rage. Most recently, it was shadow Chancellor Ed Balls who threw his not inconsiderable weight behind relief reforms.
Despite having had a decade at the Treasury to push the case for reform Mr Balls is suddenly a convert. He wants to cut relief available to those earning £150,000 from 50 per cent to 26 per cent. Apparently this will raise enough money for the Government to be able to row back on its cuts to tax credits. Bash the rich and back so-called hard-working families – perfect Mr Balls-style political opportunism. You have to admire his chutzpah.
Of course, Mr Balls's figures don't add up, but that has never mattered to him as long as his career is edged forward; he learned a lot at the feet of Gordon Brown. However, I agree with cutting the relief in the Budget– for 40 per cent taxpayers too – but not to fund tax credits, which are also dogged by fraud and inaccuracies.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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