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A consumer&#39s view

There are two important messages from the Chancellor&#39s pre-Budget statement which IFAs should pass on immediately to their clients.

First, anyone with a significant amount of borrowing, in particular a big mortgage, should fix or cap the rate as soon as poss-ible. Depending on how mortgage fixed-rate packages react, it might even be worthwhile paying a penalty to get out of an existing concessionary mortgage and switch to a fixed or capped rate.

Second, anyone coming up to retirement should delay buying an annuity for at least two or three years.

The reason? We are back to Old Labour&#39s policies of “tax and spend” and interest rates are going to rise as a result of the Chancellor&#39s refusal to cut spending and instead increase borrowing.

This is good news for savers and purchasers of annuities. But very bad news indeed for borrowers – particularly at a time when personal credit is at an all-time high and homebuyers are borrowing record multiples of income to finance house purchase.

Anyone who doubts that interest rates will rise should look at what happened to gilt prices on the day after the Chancellor&#39s statement.

The market reacted immediately. Prices fell and yields increased, with short-dated gilts now yielding 4.17 per cent and long gilts around 4.7 per cent.

There is also a clear indication of the way that interest rates will go in the appointment of deputy governor, Mervyn King as the new governor of the Bank of England. Mr King is regarded as a hawk on interest rates, having voted for an increase back in June and July. Interest rate futures have already priced in a greater probability of rate rises.

If the prospect of interest rate rises and what that will do to mortgage rates and household budgets is not gloomy enough, experts quite rightly point out that Gordon Brown&#39s arithmetic does not add up and tax increases look “inevitable, later in this Parliament.”

Pension savers should also take note of the weasel words in the Chancellor&#39s statement. He appears to be Mr Nice Guy when he said that tax relief on pension contributions and the tax-free lump sum were safe. But the obvious question to ask, which was neatly avoided in the statement, is at what rate is pension tax relief to be retained? Higher-rate taxpayers still face the possibility of a reduction to basic-rate tax relief only. Could this be another “buy now while stocks last” opportunity?

The Chancellor has left himself the option of announcing any change in tax relief in the Government&#39s Green Paper on pensions, due to be published on December 17, which proposes to “simplify” the tax treatment on pensions.

While there is good news for pensioners on low incomes with the increase in personal allowances, and the raising of the minimum income guarantee, the Chancellor again missed a golden opportunity to simplify the tax treatment of pensioners&#39 income. He announced the introduction of the long-awaited pensioner tax credit but most experts believe it will do little to alleviate poverty among the elderly.

He could easily have done more. The total abolition of all tax on investment income would cost no more than a maximum of £2bn of that extra £20bn the Government is borrowing. The really rich never pay tax on their investment income anyway.

The cost could be reduced still further by limiting the abolition to those with incomes below, say, national average earnings – currently just over £23,000 a year.

Why introduce complicated pensioner tax credits which will cost, on the Chancellor&#39s own assessment £2bn anyway but will be almost totally incomprehensible for the average pensioner? At least one million of those eligible are not expected to claim.

Tax on savings is iniquitous since, by definition, the money has already been taxed once when it was earned. Why should it be taxed again when it is received as income in retirement? What a wasted opportunity.

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