View more on these topics

Moore&#39s code

Two recent stories have created an interesting situation for independent financial advisers and their clients.

First came rumours that the Treasury has been looking at the possibility of removing or phasing out the gen- erous concession which allows pension savers to take up to one-third of their accumulated pension fund as tax-free cash at retirement. The figure is around 25 per cent if they are personal pension savers as opposed to holders of the old retirement annuity contracts.

This has been denied by the Treasury but it would be a stupid Chancellor who did not, at the very least, make sure that he had an up-to-date figure on precisely what this concession was costing in lost revenue and therefore what extra tax could be rounded up by removing it.

The Revenue claims not to know what the figure is but it is estimated at several billion pounds, which could come in handy if a recession begins to bite just as public spending plans are taking off.

In spite of the denial, the rumours gained currency again when Tony Blair warned only days ago that wealthier individuals face the prospect of higher taxes through the “redistribution of wealth”.

This flies in the face of a manifesto commitment not to increase income tax, and the conclusion is obvious.

The abolition or phasing out of the tax-free lump sum at retirement has to be on the Chancellor&#39s top 10 list of ways to raise extra revenue, even if it has not yet reached number one.

If there are no increases in income tax, the options for raising taxes from wealthier individuals without affecting the rest of the population are limited.

While it is difficult to justify giving huge tax concessions to savers who are, by definition, above average in terms of wealth, now would not be a good time to be doing away with this particular piece of largesse.

At a time when the Government is doing everything in its power to persuade us all to save for our old age, removing this tax concession might well prove to be the final nail in the coffin of pension saving for many.

The steep falls in share prices have been more than enough to make investors wary of pension saving.

An increasing number of IFAs report clients discontinuing contributions to existing personal pension schemes, particularly among the 55-plus age bracket, who have probably moved a substantial proportion of their pension portfolio into cash or bonds as they approach retirement.

Apart from the tax relief on the contributions, it is a less than exciting proposition, putting money on deposit earning 3 per cent or so, with no prospect of capital growth and a huge loss of flexibility in terms of what you can do with the money after retirement.

It becomes even less attractive if you remove the ability to get at some of your cash taxfree.

Many people have decided that the money saved by discontinuing pension contributions would be better employed in buying a second home for holidays or retirement, with the possibility of earning rental income and possibly making a worthwhile capital gain.

But this still leaves IFAs and their older customers with a dilemma.

Do you believe the Treasury when it says that the Chancellor has no intention of doing away with this tax concession? Or do you take avoiding action?

There must be a huge incentive for anyone over 50 to pocket the tax-free cash while it is still possible to do so. This means taking retirement benefits from the pension scheme, although there is nothing to stop the individual from continuing to work.It does mean that the taxfree money is safe in the bank, out of the Chancellor&#39s clutches, and available for reinvestment elsewhere.

So what does the conscientious IFA advise? If the client takes early retirement, there may be a loss of commission. But if the client reinvests the tax-free sum with- drawn, commission could easily be replaced.

Indeed, if the original pension commission was all taken up front, then there could be a positive improvement in IFAs&#39 earnings if they recommend their clients to take the money and run.

Recommended

NU moves into structured bond arena

Norwich Union is entering the structured product market with a four-year monthly or annual income bond linked to the DJ Eurostoxx 50 index of leading European companies.The Prosper bond, which opens for investment this week, guarantees an annual income of 6 per cent paid monthly, annually or as a lump sum on the day before […]

Surprise at move to sell Swiss Life UK

Protection giant Swiss Life UK has been put up for sale by parent company Swiss Life Group in a “surprise” move following a review of its corporate strategy.The group says it will focus on its core European life and pension businesses.All other niche businesses, including operations in Italy and Spain and Belgium, are to be […]

Sweet VCT takes second bite of the cherry

Teather & Greenwood is issuing further shares in its Alternative investment market (Aim) venture capital trust (VCT). The company expects thus year&#39s VCT season to be slow, so it is issuing C shares early in an attempt to raise a maximum of £10m. This VCT invests mainly in companies quoted on Aim that have above-average […]

Batchelor out as AMP pumps cash into Pearl

AMP group chief executive Paul Batchelor has resigned following the publication of a prospectus aimed at raising money from Australian investors which disclosed the precarious state of the Pearl with-profits fund.The move, announced following a board meeting in London on Tuesday, will also see group chairman Stan Wallis step down when a replacement is found […]

Finding security in bond markets

Martin Foden, head of credit research at Royal London Asset Management, explores the role of secured bonds, considering the impact of default and the characteristics of secured bonds versus supranationals and highlighting some examples. He also examines the evolution of the credit market and rating agency inefficiencies. Read the article in full: The value of […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment