What the Chancellor needs to do before anyone can plan for the future

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The Independent Online
The sight and sound of the Government falling off a succession of financial high wires is not an encouraging one, unless you happen to be a Conservative politician. Last month it was the special treatment for tobacco sponsorship of Formula One racing, last week it was the belly- flop launch of the individual savings account and this week the painful consequences when plans to cut benefits for single parents who will not or cannot find work tripped over the welfare to work programme.

It is increasingly clear that ever since it came to power this Government has been making policy piecemeal, when what is needed is an all-embracing review of taxation, mortgages, pensions, benefits and savings which will let savers, investors, borrowers, financial planners and their customers have all the facts they need to make long-term financial decisions.

Take pensions. Proper pension planning needs long-term stability and certainty, yet the pensions industry does not know whether it is coming or going. Everyone agrees that the role of the state has to be scaled down, that company pension schemes linked to final salary and length of service are giving way to portable personal pension plans. Yet millions of people have no private pension plans in position and most of those who do are not putting away enough each year to be comfortable in retirement.

The Government has set out proposals for stakeholder pensions to try to bring in the 10 million people who do not yet have a private pension plan. They have been widely welcomed but we still do not know whether they will be available to existing pension holders as well, or what the tax regime will be.

But almost the Chancellor's first act in the July Budget was to cut the existing tax relief pension that funds enjoy, a move which will reduce the prospective pensions a given sum will buy in future by up to 10 per cent. The rebates on national insurance payable to people who opt out of the state earnings-related pension scheme (Serps) have been cut back to the point where many financial advisers think more people, should consider moving back into Serps. A new review of rebates has been promised but will not be operative until April 1999.

A Royal Commission has just been set up to review ways of providing affordable insurance policies to help people pay for long-term residential and nursing care, but the commission will not report for 12 months, it could be two to three years before it is on the statute book and there are no clues how it might fit into the overall tax and savings picture. Companies like PPP Healthcare have promised that anyone who buys a policy now will not be disadvantaged by any future changes, but this is hardly a recipe to encourage customers to buy now, and this is not a business where time is on the side of the purchaser.

The Chancellor also plans to reform the tax system, but this only creates uncertainty about the future of tax-free lump sums which are such a vital part of the appeal of personal pensions. Suggestions that the Treasury would like to remove tax relief on contributions to pension funds and switch it to pensions in payment, so that pensions are treated the same way as tax-free investments may well have an intellectual appeal, as well as improving the Treasury's own cash flow by several billions a year. But until the issue is cleared up, investors do not know whether to bet on a pension or a PEP.

Well they will soon, if the Paymaster General has his way and the lifetime limit on the tax-free savings accounts that will replace Tessas and PEPs is pegged at pounds 50,000. That is a nice little tax-free nest-egg but nothing like enough on its own to provide a comfortable income for life. Now I have some sympathy for the Chancellor because someone somewhere has to pay some tax and the line did need drawing on PEPs some time ago. But for obvious political reasons no Tory government was going to take unpopular decisions that could be left to Labour.

However, the proposed pounds 50,000 limit is going to force far too many people to rethink their financial planning from 1999. Likewise, the Government should have lifted the ceiling on Tessas by pounds 1,000 a year instead of imposing a pounds 1,000 limit on cash investments in an ISA. Meanwhile, the working poor will never be able to save conventionally. They need something really worthwhile, like a national insurance rebate that cannot be spent until they retire.

The rumours have been going round that the Chancellor plans to abolish top rate tax relief on pension contributions. Although it creates a sense of relief when he does not do so, in the long run proper investment planning is impossible unless investors know the tax environment in which they are working.

Lack of information over the future of capital gains tax and inheritance tax is also creating uncertainty. It simply helps advisers and accountants to sell avoidance plans that may or may not turn out to be effective. The Chancellor missed one chance in the green budget last month to introduce reforms which would have let investors know where they stand.

The latest round of rumours suggest that the Chancellor is also planning to reform separate taxation of married couples, although no one seems to be sure whether he intends to restore the incentives to married couples the previous government had progressively reduced; or whether, as some alarmists think, he is planning to tighten controls on the transfer of assets between spouses as part of a move to make inheritance tax more effective. That, in turn, would create a new set of rules governing lifetime gifts and asset transfers between spouses and sow more confusion into the divorce law where plans for pension splitting are slowly emerging.

If there really is a master plan in the Chancellor's mind and there really is logic and order in the apparent chaos I will be the first to take my hat off to him when the reform is complete, the loopholes have been closed and the financial services industry can get down to lifetime financial planning for its clients. But the prospects are not encouraging.

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