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Labour’s Andy Love warns of Isa cuts

Treasury select committee member Andy Love has warned the Government may look to reduce tax incentives on Isas in next month’s comprehensive spending review.

Speaking at the fringe event at the Labour Party Conference in Manchester this week, the Labour MP for Edmonton said the Government may target Isas as part of its package of cuts.

He said: “We have seen the coalition cancel Child Trust Funds and the Savings Gateway which were two of the primary incentives that were offered under the previous government. There is also a debate over Isas and while the coalition is saying they are supportive of Isa structures there have been a lot of rumours that they may be subject to the spending review.”

The current Isa limits are £5,100 for cash and £10,200 for stocks and shares and will be index-linked from next April. Government estimates suggest it spent £2.2bn on Isa tax reliefs in 2008/2009 and £1.6bn in 2009/2010.

Love said: “It is quite hard to see where the incentives to save are going to come from over the next few years and therefore what the role of the Government is.

“They are suggesting they need to create what they are calling simple, transparent and flexible vehicles for saving but they are not suggesting that there ought to be some incentive structures. I would argue very strongly that there need to be incentives built into those vehicles.”

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Comments

There are 23 comments at the moment, we would love to hear your opinion too.

  1. As pensions are basically pointless for the basic rate tax payer with no employer contribution ISA ( stocks & Shares) is the only way left for the ordinary investor to invest with a reasonable long term incentive.

    Would the coalition really be daft enough to reduce ISA levels ? Perhaps they don’t want a second term ?

  2. Conference season posturing by Labour. Not a cat in hell’s chance.

  3. John Blackmore,

    Can you tell me why pensions are pointless for a base rate tax payer?

  4. Agree with Steve Laird. From where are all these rumours supposed to be emanating anyway?

  5. I agree with Steve Laird. Can you imagine the effect this would have on the savings gap?

  6. I can see cash interest being targeted. Not a big cost to investors while rates are low, but should they rise………. Last time I checked, the basic rate tax on dividends was the same inside an isa as out of it.

  7. Let’s be honest, the tax relief on ISAs is a good marketing ploy but makes virtually no difference to any savvy investor. ISAs just keep the administration (reporting to HMRC that you have received 10p in interest/dividends) less onerous.

    Any estimate of cost to the government is hugely exaggerated !

    Anyway, if this government does anything to harm the last incentive left to save for the future then it is as stupid as the last bunch of morons. Also remember, that without investors putting money into stock-and-shares ISAs, less money will be available for corporate-UK to grow.

  8. when you consider that it was a conservative chancellor that created the tax incentives that now live on in the form of ISAs (Lord Lawson in the 1980s with PEPs and TESSAs) it seems highly unlikely that a conservative administration would remove them!

    i agree, more labour posturing. they’ll blame the weather on the government next… oh they already have as an effect of the proliferation of oil/gas/nuclear/CO2 on the environment!

    what a joke!

  9. Pensions are pointless for BR tax payer, WHY???

  10. I knew him when he was a lowly member of the Labour Party in Enfield 20 odd years ago and he didn’t make much sense then either!

  11. ISAs are increasingly being used as a way to pay off interest only mortgages. If they stop them, they’ll put another nail in the housing market coffin.
    I didn’t understand the pensions comment either. My limited knowledge of pensions suggests they enjoy tax free contributions AND capital growth free of tax

  12. Like David I would like to know why John thinks pensions are pointless for a Basic rate taxpayer?

  13. I agree that pensions are – if not pointless – at least of marginal use. If we disregard, for the moment, the 25% tax-free cash, the difference between the two is that the pension tax relief is taken at the outset with the proceeds being taxable, but the ISA is funded from taxed contributions with the proceeds being taxable.

    In other words, and if we assume the same percentage returns and effective annuity, the returns for a basic rate taxpayer are broadly the same.

    The main benefits are the 25% tax-free cash which is not insignificant, and the protection of the client against the temptation of spending their retirement fund. Against this, though, we must balance the restrictions of not being able to access the full fund if really required, not being able to pass the fund on to the next generation, and the fact that income can be taken from ISAs without having (in some cases) to have to weigh up the various options – single or joint annuity, escalation and so on.

    I do think that we must bear the above issues carefully in mind before offering pensions to potential clients.

  14. In response to David Carter, if you’re receiving 20% tax-relief at source you’ll have more invested and thus more benefiting from any growth over the longer term this could be significant.

    I.e. 80p invested with 20p tax relief is going to grow much more with compounded growth resulting in a higher level of income than 80p invested.

  15. Maybe ‘Anonymous’ could brush up his or her maths.

    £100 gross will yield £80 net (I’m ignoring NI, here, as its influence will be the same whether in a pension or an ISA). That same £80, now invested in a zero fee ISA at 5% growth for 5 years, will generate a total fund of £102.10

    Instead, invest the £100 gross into a zero fee pension fund, also growing at 5%. That pension fudn will grow to £127.63 after 5 years. If that is now taxed at 20% then – guess what – you get £102.10

    Clearly there are other considerations here, such as annuity purchase compared with a lump-sum argument, but my overall statement remains correct, with the advantage of pensions for BRT during both contribution and retirement condensing down to the tax-free cash element. Where the contributor will fall into a lower tax band on retirement then pensions may become starkly more advantageous – but, as I said above, the correct solution is not always obvious.

  16. You have gotta love MPs!!!! They arnt happy unless they are stiring something up!!

  17. To those who have asked – yes it is all a question of assumptions.

    Keeping things simple and comparing as alternates Pension and ISA it is not difficult to calculate a break even point where someone who opted for pension and then annuity does better than someone who opted for ISA.

    For the basic rate taxpayer with no employer contribution, 5% assumed annuity rate, 5% assumed ISA growth rate break even occurs at age 192. assuming higher annuity rates and lower growth rates can reduce this age to just over age 100. I have yet to find a set of assumptions that makes me think that pension for the basic rate tax payer is a good idea.

    To those who say that more is invested because of tax relief up front – this is not entirely true. Tax has to be paid on the way out thus canceling out the tax relief benefit ( apart from the tax free lump sum) unless you can arrange to die and provide the whole fund tax free.

    The ” I can’t trust myself” argument is a good one – which is why we should have a compulsory state pension but the sort of clients that an IFA deals with should have more character and not be so foolish.

    From my point of view £10,200 each from husband and wife is the first call when planning for retirement.

    Although I would be happy to see a compulsory state pension scheme I would not be happy to see ISA limits reduced.

  18. Pensions for basic rate taxpayers

    i recall that Tom McPhail wrote a very good piece on this subject and if he is following this thread perhaps he can tell us where to find it (I have lost my copy!)

    Also the FSA did some very intensive research on this subject some years back which is worth reading if you can get hold of it

  19. John, I can agree with you that if you look at pensions vs. ISA for basic rate taxpayers on a purely mathematical comparison then there is not much to choose between them.

    In reality, however, we have to take into consideration the client who is a human being and in my experience when looking at lifetime savings tends to rob ISA for short-term pleasure e.g. holiday of a lifetime, kids weddings and any other short-term spending plans that tend to come up.

    The two major advantages of using pension are;

    1. assets put aside for retirement
    2. they are ring fenced from all creditors.

    This can be a major advantage for people that find it hard to put money aside for retirement and for those who may at some stage within there working life go bankrupt.

    The problem of coming up with statements like pensions do not suit basic rate taxpayers is that we tend to forget that other benefits of the contract.

    As a group of professionals, we need to encourage people to save more and to get serious about their retirement options whether that is using ISA or pensions.

  20. they are ring fenced from all creditors.

    Apart form ex-wife or ex-husband obviously

  21. Andy Love – MP for Edmonton???????????

    Who?

    Another Horses Bottom Opens his mouth – speaks through it and like Pavlov’s dogs you all respond.

    A duly elected Social Worker – as if we don’t have enough on the other side of the house.

  22. Well loads of noise around this stuff.

    Five major reasons why pensions are still a good thing

    – human behaviours ie cannot touch it

    – tax free cash

    – employer contributions ( given what is planned with NEST / A-E these will be mainstream )

    – potential NI saving through salary exchange

    – for the majority the pensions charges are lower than ISAs

  23. The human behavior argument is often quite funny.
    I remember once reading how the head of a uk pension provider when moving house was so glad that his money was locked up in his pension rather than available via his PEP. I believe that he ended up taking out some expensive short term loan. The hold that pension has on the mentality of those advising on or planning for retirement is really quite amazing.

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