Brown study

The Budget box contained little to boost the savings industry, says Morgan Stanley Quilter executive director Charles Maisey.

It is hard to believe that the outcome of the forthcoming general election was not the dominant thought in Chancellor Gordon Brown’s mind as he framed the details of his ninth Budget.

At the macro-economic level, there is an imperceptible fiscal tightening if optimistic growth forecasts are achieved in the next year or two, so the Bank of England is unlikely to take fright and raise interest rates based on the Budget alone. Time will tell whether the electorate are so persuaded.

For investors, probably the best that can be said is that the Chancellor has created a cradle-to-grave investment landscape through the combination of the child trust fund, introduced in the 2004 Budget, and this year’s announcement of the first 50-year gilts.

However, once again conspicuous by its absence is any evidence of the development of a long-term strategy towards savers and the savings industry.

Among the inevitable detail of regulation and proposed legislation, the Chancellor managed to find space to regularise the taxation of employees who had previously been loaned bicycles by their employers. While this may well be a worthy initiative, the notion of a well constructed approach to savings must surely be more important in the long run.

Although existing Isa limits of £7,000 for a maxi-Isa and £3,000 for a mini-Isa have been extended by one year to 2010, one can question the appeal of a product which may face closure in five years over one which may close in four.

Coming back to the issue of 50-year gilts, where a conventional stock is expected to be followed by an index-linked issue later in the year, what conclusions can investors draw? The launch of ultra-long-dated bonds is said to be driven by demand from pension fund trustees – the same trustees who were selling equities as markets fell in 2002 and 2003 to meet regulatory requirements in terms of solvency. These instruments will enable trustees to match their long-term liabilities with similar long-term assets.

The actual level of demand at their launch will be watched with considerable interest at a time when the gilt yield curve is downward sloping and redemption yields are at relatively low levels by historic standards.

Admittedly, the Bank of England now sets interest rates within the framework of its inflation rate target but the inexorable erosion of value at even two to three per cent inflation remains a threat to all investors in conventional bonds.

At 2 per cent inflation, £100 in today’s money will be worth £37.16 in 50 years. At 3 per cent inflation, the decline in purchasing power will leave £22.48. In essence, there is a question mark over the relevance of these instruments for all but a few investors.

Where inflation erodes the real value of money, investors have sought protection in real assets and the Budget confirmed that real estate investment trusts will be included in the 2006 Finance Bill.

The property industry has welcomed the announcement, which at this stage appears to meet most of the sector’s expectations. A potential stumbling block will be the tax cost for those property companies wishing to convert but the principle of an efficient vehicle for property investment can only be applauded.

However, the devil is in the detail and, as the final regulations remain subject to consultation, the hope must be that the potential of Reits is not eroded by overcomplication.

The lack of relevance to the majority of savers means there are probably not too many votes to be gained or lost in the flow of anti-tax avoidance legislation. But while the heavy boots of regulation are on the march to stamp out any possible loopholes, the consequence is that the majority of investors are left in limbo, unable to make long-term plans.

If a coherent approach to saving is hard to identify, what else is missing from the Budget? A rise in the inheritance tax threshold from £263,000 to £275,000 and eventually £300,000 in two years is not much more than a sop to many homeowning families.

For investment-owning families, the failure to address capital gains tax and the complexity which has been created is a major disappointment.

The simplicity of the tax arrangements for business assets and attractions of a 10 per cent tax rate after two years are in stark contrast to the difficult calculations of taper relief over 10 years and the prospect of tax at up to 40 per cent for private investors.

There is one last thought – or perhaps it is a caution – for investors looking at the Chancellor’s proposals. There is an uncanny coincidence of peaks in investment returns and changes in the law. The examples stretch from Peps and the 1987 stockmarket crash, Tessas and the almost inexorable decline in interest rates from 1990 to the Trustee Act 2000 and the bursting of the stockmarket bubble.

Coming up on the horizon is pension simplification and the possibility to include residential property in pensions.

Beware politicians bearing gifts? You may end up taking them to your grave.

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