Your personal manifesto: pre-empt the politicians

YOR MONEY Jean Eaglesham looks at what you should do with your finances before the election
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The Independent Online
"Read my lips. No new taxes." Anyone planning their finances in the run-up to the general election should remember that George Bush broke this infamous election pledge once he became US President.

While the jockeying for position on critical financial issues is likely to go on up to polling day, the recent round of party conferences has shed more light on election platforms, though recent history indicates that commitments on tax ahead of an election tend to be, at best, evasive and, at worst, untrue.

The Tories' pillorying of Labour's "tax bombshell" before the last election was followed by hefty rises in indirect taxes, particularly Value-Added Tax, once they were back in power. New Labour is now so anxious to avoid the high-tax tag that it is refusing to spell out its detailed tax proposals until after the November Budget (if indeed it does so then).

In fact it is no coincidence that the only party advocating higher income tax, the Liberal Democrats, is the only party that accepts it cannot win.

But if the various political promises should be treated with healthy scepticism, so too should dire pre-election warnings from the financial services industry. New Labour's latest manifesto promises that "there will be no return to the penal tax rates that existed in the 1970s ... indeed, we would like to reduce taxes for ordinary families."

While this falls short of a commitment not to soak the rich, or at least wet them a little, Alistair Darling, the shadow chief secretary to the Treasury, says: "It's absolutely obvious to us that a number of accountants are attempting to drum up business by trying to scare their clients into reordering their affairs, with no justification whatsoever."

Whether you buy this argument or not it is always dangerous to let tax ploys alone dictate your financial strategy. "Try not to let speculation get in the way of common sense. Most people should continue much as normal," counsels Craig Foreman of Touche Ross, the accountants.

Given that important caveat, however, there are areas where it is worth considering taking action before the election or even, in some cases, before the Budget on 26 November.

Mortgages

"Switch your mortgage to a long-term fixed rate. The inflationary cat is out of the bag and interest rates will go up after the election, whoever wins it," advises Graham Hooper, investment manager at Chase de Vere, an independent adviser in Bath.

Most economic commentators back this view, although few expect the post- election rise to be more than a percentage point or so. The longer-term outlook is anyone's guess, although all three parties say they intend to keep long-term interest rates low. If, and it is a huge if, the UK decides to join a single currency then interest rates will have to come down.

So switching from a variable to a fixed-rate mortgage is still something of a gamble. Provided, however, you can recover the costs of the switch (based on current rates), locking into the historically cheap deals that are around may be worth while.

On a more prosaic level, homeowners should not hold out any hope of higher tax relief on their mortgage payments (Miras). The value of this tax perk has fallen over the past couple of years from 25 per cent to just 15 per cent of the interest on the first pounds 30,000 of a mortgage.

While Labour has dismissed speculation it will abolish Miras, the Government has promised to keep it in place only until the election and refused to rule out abolition thereafter.

Pensions

Anyone who harbours the illusion that they can rely on the state pension for an adequate income in retirement should think again.

While the Liberal Democrats want the state pension substantially increased, the cost of doing this means they would be unlikely to achieve their aim, even if there was a hung parliament. That is partly because the motion put forward at the Labour conference by Barbara Castle, the former cabinet minister, to uprate the state pension in line with average earnings rather than the retail price index was defeated. This ensures that the state pension will make up a progressively diminishing proportion of incomes.

Instead, all three parties are now openly backing the increased use of private plans to supplement the state pension. Labour says it will review pensions after the election but it has floated the idea of a "stakeholder pension" to run alongside existing personal pension policies and occupational schemes. It is not clear exactly how this would work. But it might involve pensions being offered by a much wider range of bodies than the pensions industry - perhaps National Savings and trade unions. The pensions would also, says Labour, have lower running costs than personal plans.

One other possible change if Labour wins the election is that people will be allowed to draw the state pension at any age between 60 and 70, with the amount of the pension rising the longer you wait. Peter Lilley, the Secretary of State for Social Security, claimed in his speech to the Conservative conference that this approach would "bankrupt the state pension scheme", but it is backed by the Liberal Democrats and so could happen if there was a hung parliament.

On the more pressing question of pre-election pension planning, most advisers say there is little point in radical action. As Mr Foreman points out: "One school of thought says higher-rate taxpayers should pay maximum personal pension premiums while there is still top-rate (40 per cent) tax relief on them. Others say the top rate might go up to 50 per cent so why not hold off contributions until after the election?" However, he does say that people nearing retirement who have already built up a big personal pension fund might do well to take out the maximum tax-free lump sum allowed under the current rules, since Labour could reduce the tax-free upper limit.

Savings and investments

Labour has reiterated its commitment to maintaining tax-free personal equity plans (PEPs) and Tax-exempt Special Savings Accounts (Tessas).

But that does not necessarily mean it would not place extra restrictions on these investments, such as a cap on the maximum total amount that an individual can hold in a PEP. It is also conceivable that another Tory government would do the same.

Either way, if you are a taxpayer it would be sensible to make as much use as possible of both Tessas and PEPs, albeit with the caveat that the stock market is now at an all-time high. It is worth getting good independent advice to check that the investment suits you and that you will get a good-quality product.

Capital gains tax

Investors sitting on capital gains that are substantially over the current (after-inflation) pounds 6,300 annual tax threshold should also get advice. "The gains tax allowances aren't necessarily going to be around for ever. You could consider selling investments to realise gains and then rolling on the tax liability into a venture capital trust [a highly tax-efficient but high-risk vehicle]," advises Jonathan Gumpel of Brooks Macdonald Gayer, an independent adviser in London.

However, Patrick Stevens, a tax partner at Ernst & Young, the accountants, points out that the Tories are committed to abolishing capital gains tax eventually and says "there's a strong point of view that the gains tax rate will come down in the next Budget." So investors may be as well to wait until nearer the end of the tax year before acting.

Shares

Any decision on buying or selling shares that you hold directly should rest at least as much on where you think the stock market and economy are going as on who you think will win the election. The main exception to this rule is the utility companies, which are uniquely at threat from a windfall tax proposed by Labour, as well as tougher regulation. Many advisers suggest selling in advance of a Labour victory, although some analysts believe the concerns are already reflected in lower share prices.

Offshore investments

Despite press speculation about a tidal wave of savings flooding out of the UK to the Channel Islands to escape Labour hikes in the top rate of income tax, the evidence suggests the flow of money offshore is fairly modest. The Building Societies Association, for example, says that total offshore deposits are up 10 per cent over the last year.

Certainly, investors should not believe that going offshore guarantees freedom from tax. True, you can defer paying tax by rolling up the income your investment earns offshore. But once you bring money back into Britain, you are still liable to pay tax on it. What is more, Labour could well tighten up the rules. Gordon Brown, the shadow chancellor, has warned that he will "not permit tax reliefs to millionaires in offshore tax havens".

Inheritance tax

John Major is committed to abolishing inheritance tax, but Labour and the Liberal Dem-ocrats have said they will crack down on a wide range of exemptions. Anyone whose estate is over the pounds 200,000 inheritance tax threshold should probably get professional advice.

Insurance

Labour's sole commitment is to ending the tax relief on premiums offered on certain private medical insurance plans to people over 60. Despite this David Bryant of Bupa, the private insurer, says he expects that "this market will grow once the economy stabilises, irrespective of who wins the election."

The Government's plans to offer incentives on insurance for long-term care are now on hold until after the election. But some initiative on this issue seems likely after the election, irrespective of its outcome.

q Jean Eaglesham works for 'Investors Chronicle'.

The parties and their policies*

Labour Conservative Liberal Democrats

Income tax Lower the starting rate to Cut the basic rate Increase the basic rate 15p or 10p. from 24p to 20p. by 1p. 50p top rate for

Possible 50p rate for high people earning over

earners (not yet decided). pounds 100,000 to raise tax

thresholds for low paid.

New 'carbon tax' on fuel to fund cuts in VAT.

Capital gains Possible tiering - lower rates Abolish it. Opposed to abolition

tax for long-term investments.

Inheritance tax Close loopholes. Abolish it. Close loopholes.

Savings and Keep PEPs and Tessas. No specific pledges. Replace new PEPs and investments Possible new individual Tessas with an individual 'Savings Account'. tax-exempt allowance.

State pension Review after election, but No change. 'Substantial rise in

fundamental change unlikely. overall level'. Choice of retiring age 60 to 70.

Private pensions 'Stakeholder' pension, to run No major changes. Every employee to have alongside existing pensions. Pensions to be more automatic entitlement to flexible. employer contributions.

Insurance Abolish tax relief on private No change. Abolish tax relief on medical insurance for over-60s. private medical insurance for over-60s.

*Many of the above are long-term aims, rather than specific short-term commitments

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