Simon Read: New rule, new rules for your personal finance intentions
Saturday 15 May 2010
We've a little time to pore over the new coalition government's personal finance plans, but three things stand out: their commitment to end compulsory annuitisation at age 75, the rise in the rate of capital gains tax (CGT), and the cutting-back on the child trust fund scheme.
While we'll have to wait until next month's emergency Budget to find out full details of the new rates of CGT, more tax is bad news for your personal finances. However, it looks like there's an opportunity now for people with considerable assets to realise gains at the current lower rate of 18 per cent. It's one to talk over with tax experts.
The planned ending of having to buy an annuity by the age of 75 is welcomed by the pensions expert Tom McPhail of advisers Hargreaves Lansdown. "The abolition of compulsory annuitisation may not be relevant for the majority of investors because their savings will not be substantial enough to take on longevity and investment risk after retirement," he says. "Nevertheless, the fact that investors will be able to retain control over their own money will encourage saving in the first place."
However, there is a sting in the government's proposals, warns Annie Shaw of CashQuestions. com. "Allowing people to duck out of annuitisation further diminishes the annuity pool, which benefits from mortality cross-subsidy," she explains. "Those who fail to survive long enough to get their money's worth end up paying for those who would otherwise outlive their savings."
In other words, the fewer people who take out annuities, the less the payout anyone who does so could get. Which will make annuities even less attractive than they are now. Which will in turn leave anyone needing to use their cash to secure an income in retirement facing a bleak future. And who is likely to need to turn to annuities? The less well-off.
Finally, child trust funds. I'm a great fan of these as they give all kids a start in life by handing them cash that they can't touch until they're 18. The scheme is relatively inexpensive and from 2020 – when the first of them will be able to get at the cash in their fund – young adults will inherit a combined £2.5bn each year, according to figures from Family Investments.
However, there's a glimmer of hope in the coalition's proposals, which refer to "reductions" in child trust funds rather than their abolition. I hope that means the new government will retain the spirit of child trust funds, which are aimed at encouraging parents and grandparents to build up a tax-free lump sum for their offspring.
Cutting back on the Government's contribution – £250 at birth and another £250 at age seven, with high contributions for the most-needy families – will save money. But scrapping child trust funds altogether will mean scrapping an important investment in our children's future.
"Child trust funds have had a profound effect on Britain's savings habits," says Kate Moore of Family Investments. "Almost a third of parents now regularly put money away on their children's behalf, up from just a fifth before the introduction of the scheme." For that reason alone it's essential they continue in some form if children are to continue to have a financial future to look forward to.
I have had a massive reader response to my mention last week of HM Revenue and Customs' (HMRC) tax coding cock-up. I'll return to the subject in a future issue with readers' experiences and the tax authorities' reactions but, for now, I was surprised by the utter anger many people feel at the way they've been treated.
Generating a lot of anger is the seeming impossibility of being able to get through on the Revenue's helpline to sort things out. Of course, the lines are busy with tens of thousands of people looking to correct the Revenue's mistakes, but some readers accuse the Revenue of simply giving up trying to help.
"They've shut themselves off from the public they're supposed to serve," one angry retired accountant told me. He accuses the Revenue of arrogance. "They don't even give you the option of getting in a queue when you call them, you're just cut off," he says.
I don't subscribe to ideas of a high-level tax conspiracy as another reader suggested, but I would like the tax authorities to answer readers' fears. With that in mind, I'd like to hear of more of your experiences recently with the Revenue and any questions you'd like to ask them. Let's find out how deep the problem is, and give HMRC an opportunity to put the record – and situation – straight.
Working for all of us?
The appointment of self-described "quiet man" Iain Duncan Smith as Work and Pensions Secretary is an interesting one. Will the former Conservative leader fight to improve the lot of struggling working-class families? Or will he oversee new policies to featherbed the future of the well-heeled like himself?
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