The weeks leading up to George Osborne’s Budget statements were filled with frenzied speculation.
Famed for his tinkering, the former chancellor’s Budgets enshrined a number of eye-catching and popular reforms, including landmark pension freedoms, and some not so popular ones, such as a reduction in the amount an individual can put into their pension and still enjoy tax relief. Just days before last year’s statement, Osborne rowed back on a major initiative to flatten the rate of pensions tax relief, fearful that Tory voters would express their displeasure in the EU referendum two months later.
In contrast, Philip Hammond’s first Budget is expected to be a muted affair, befitting the chancellor’s nickname “Spreadsheet Phil”.
With Article 50 to be triggered at some point this month, radical announcements will be thin on the ground. Hammond will probably announce the outcome of a consultation into a reduction in the Money Purchase Annual Allowance (MPAA), which limits anyone who draws from their pension from saving more than £4,000 a year (currently £10,000) afterwards.
The decision has been widely criticised by the pensions industry, but with the MPAA change taking effect next month, Hammond is unlikely to row back. Reports have suggested that ministers are considering forcing people to pay for social care from their inheritances, but a reform package is being prepared for the autumn.
If the chancellor is looking for some inspiration, City A.M. has asked wealth planners and financial experts for their ideas to improve the nation’s finances.
The amount of money that you can currently put in a pension without incurring tax charges came down under Osborne, from £1.8m in 2010 to £1m today. Known as the Lifetime Allowance (LTA), 90,000 people had applied to HMRC by October last year for protection from the potential tax charge of 55 per cent on any “excess benefits” which come with exceeding it.
Seen as a disincentive to save for retirement, calls from campaigners for the LTA to be scrapped entirely have fallen on deaf ears so far, and no change is expected next week. But Tom Selby, senior analyst at AJ Bell, suggests that the chancellor could remove it to soften some of the blow from the reduced MPAA.
Steven Cameron, pensions director at Aegon, suggests that the government could increase the LTA back to £1.25-1.5m on the condition that the extra provision was used to pay for a pensioner’s own social care if they need it. “As people live longer, funding social care through local government is becoming unsustainable,” says Cameron. “Savers would promise to leave the extra money untouched, and they could pass it on when they die, if it has not been used.”
People don’t want to lock money away on the grounds that they will be one of the unlucky ones
Last year, former pensions minister Ros Altmann touted the idea of a “care Isa” as a solution to the social care funding gap, but Cameron thinks that a separate product is not the best idea. “People don’t want to lock money away on the grounds that they will be one of the unlucky ones,” he says.
In 2014, the government abolished stamp duty on transactions by private investors on the Alternative Investment Market and High Growth Segment of the market. This relief should now be extended beyond major exchanges like the London Stock Exchange to all British businesses within growth markets, argues Stuart Lucas, chief executive of Asset Match. “This should include the UK’s vibrant private scale-up community,” he adds.
“The added cost of stamp duty imposes significant implications upon the ability to recycle locked-in cash, providing an unnecessary impediment to growth,” says Lucas. “What the government deemed to be ‘growth markets’ in 2014 is, almost three years on, still limited to listed companies.”
There is now an Isa for almost every day of the week, argues Mark Farrar, chief executive of the Association of Accounting Technicians, needlessly complicating a tax-free wrapper designed originally to be simple.
Some Isas have age limits. Three currently have a maximum savings limit of £15,240 a year, while the Junior Isa has a limit of just £4,080, Farrar points out. Meanwhile, the bonus structures of the Help to Buy and Lifetime Isas have added extra layers of complexity.
Read more: Lifetime Isa: The making of a monster
With the introduction of the personal savings allowance (PSA), basic-rate taxpayers can now earn £1,000 in interest without paying tax and higher-rate taxpayers can earn £500, removing around 95 per cent of savers from paying tax on interest, leading some to call for Isas to be scrapped altogether.
Increasing the IHT allowance would encourage some of that money to cascade down the chain, giving a welcome financial boost to younger generations
But such a move would penalise additional rate taxpayers, who don’t qualify for the PSA. According to Farrar, abolishing them ignores the possibility of higher interest rates in the future, the fact that top paying interest accounts prevent savers from accessing their money at any time, and the ability to pass on an Isa allowance to your spouse when you die.
Rather, Isa standardisation should be explored. “It would be far better to have one or two simple Isas which merge the most important benefits and discard any unnecessary complexity,” says Farrar.
A small number of FCA-approved platforms have already begun offering the Innovative Finance Isa (Ifisa) this year, extending the Isa wrapper to cover P2P investments.
However, the FCA is still exploring the new forms of structuring that P2P platforms are engendering, and Ifisa investors are currently restricted to investing in no more than one P2P platform in the same year, despite the fact that many platforms use auto-bid tools to spread risk internally on that platform.
“It is not sensible from a risk-management perspective to have all your eggs in one basket,” says Stuart Law, chief executive of Assetz Capital, which is one of 85 platforms currently awaiting FCA approval for their Ifisa products.
From 6 April, changes to inheritance tax (IHT) will mean that couples who own a house worth £850,000 will be able to pass it on their children IHT-free. This is because of the introduction of an additional “residence nil rate band” of £100,000 per person. However, this IHT break is only available to couples leaving their estate to direct descendants – children, grandchildren, step, adopted or foster children.
“Many couples who can’t or don’t have children are being penalised, which is grossly unfair,” says Gary Smith, financial planner at Tilney. “If you leave your estate to nephews, nieces, other relatives or friends, you aren’t going to benefit.”
There is further cause to amend existing IHT allowances. The £3,000 annual limit on gifts has not been increased since 1981, points out Rachael Griffin, financial planning expert at Old Mutual Wealth, meaning that it would be worth over £10,000 today, had it increased with inflation.
“The Resolution Foundation recently found that pensioner households are now better off than working households,” says Griffin. “Increasing the IHT allowance would encourage some of that money to cascade down the chain, giving a welcome financial boost to younger generations. This is desperately needed as intergenerational inequality is increasingly stark.”