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Budget Edge: James Dalby

Brown said the UK’s household savings ratio was four times higher than in the US and Canada but don’t be fooled. In all three countries, this is dangerously low and cannot possibly be enough to sustain people through retirement.

This year’s Budget was certainly aimed at winning votes at the general election. The amount of effort to provide new and maintain exist benefits for pensioners will clearly go down well.

Taken together, the 200 winter fuel allowance, 200 council tax credit, free TV licence (for those aged 75 and over), free sight tests, free bus travel and the pensioners’ tax credit make for a pretty powerful package. Pensioners will no doubt be pleased.

Overall, though, there was little to enthuse or indeed upset IFAs. It was good to hear that the existing maximum Isa allowance of 7,000 will be maintained until at least 2010, a signal that the Government is serious about increasing the level of household savings. But an extension had already been flagged so was no great surprise.

Gordon Brown seemed quite pleased to trumpet the UK’s household savings ratio, which stands at around 5.6 per cent. He advised us that this was four times higher than in the US and Canada but don’t be fooled. In all three countries, this is dangerously low and cannot possibly be enough to sustain people through retirement.

Changing demographics mean longer retirements and less people in work to support those in old age and as for making a comparison with the US and Canada, this is simply cherrypicking to make the UK look good. A closer to home comparison would show that the level of savings in the UK is about half of that in parts of Europe. To put that into the sort of words opposition parties might use: “Continental Europeans save up to twice as much as people in the UK.”

Perhaps the most interesting aspect of the Budget was the reform of taxation of collective investment schemes. in particular, the proposal that the daily bond fund test is removed and replaced with the commonsense approach that mixed asset funds will be able to pay out interest and dividend income to reflect the asset mix.

The current rules have led to a raft of so-called distribution funds being laun-ched to enable Isa and Pep investors to receive the benefit of the tax reclaim on the interest payments. Currently, where the bond weighting drops below 60 per cent in a distribution period, the whole of the distribution is treated as dividend, therefore leaving non-taxpayers and Pep/Isa investors unable to reclaim the tax on the fixed-interest component. There are other impacts too so the proposal to allow mixed distributions is very welcome.

News that the Government may make more than two contributions on behalf of those eligible for the child trust fund is welcome. While many involved in financial services have poured scorn on the CTF, it is an excellent initiative and will help to promote savings for children from an early age.

I would take this one step further and use child benefit letters to remind parents that they can save up to a further 1200 per year, per child. This would perhaps result in more families using child benefit for this purpose although it is reasonable to assume that most families with household incomes up to 30,00035,000 are likely to need to use child benefit as part of the household budget.

One area where the Chancellor could have tried harder is stamp duty on house purchases. While the doubling of the exempt limit from 60,000 to 120,000 sounds generous, it will not be enough to keep many first-time buyers out of the net. The average price paid by first-time buyers in the UK is around 118,000 but there are many areas of the UK where the average exceeds this level. In East Anglia, the South-west, the South-east and Greater London, the average price paid by first-time buyers comfortably exceeded 120,000 in quarter four, 2004, according to Halifax’s house price data.

One of the trickiest areas that IFAs have to navigate is that of giving advice with regards to contracting in or contracting out of the state second pension. On the whole, IFAs and insurance companies are scared to advise contracting out for fear of future misselling claims. I would have liked to see the Chancellor give some moral support to those who are faced with this dilemma. It is absolutely clear that the burden the state is carrying in unfun-ded pension liabilities is set to get a lot worse.

It surely makes no sense for the Government to build high levels of s2p liabilities but this is exactly what is set to happen. Consider this. One of the benefits that will result from pension simplification is that up to 25 per cent of a protected rights fund can be taken as tax-free cash. For many, this may help to tip the balance in favour of contracting out but you can bet IFAs will still be scared to say so.

James Dalby is head of investment strategy at Bates


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