A general election is looming. Some bookmakers have stopped taking bets on a May election and the Conservatives are staking out personal finance as a battleground.
Shadow Chancellor Michael Portillo says a Conservative Government would cut the tax on interest earned on savings unless savers have an income above £32,000. Above that threshold, the current rate of 40 per cent applies.
The Tories also propose to abolish the 10 per cent tax on dividends so only higher-rate taxpayers would pay tax on savings or dividend income. Conservatives say the savings ratio, the percentage of income saved to total disposable household income, has fallen from 10.6 per cent to 4 per cent under Labour.
What are the possible ramifications of these policies for the personal finance sector? The potential boost to savings meets with a favourable response. But Threadneedle director of communications Richard Eats wonders if the new proposals mark a shift in Tory policy.
He reminds us that Peps were introduced by Chancellor Nigel Lawson in the 1980s to lure smaller investors into investing in equities rather than keep their money on deposit.
If consumers can get a gross return at a bank, there might seem to be no benefit to having an Isa or other tax-privileged financial products.
Eats says: “A fiscal incentive to leave money in the bank means there is not so much of an incentive to go in for longterm investment.”
If there is a tax credit on directly held equity, then the attractiveness of Isas could again be undermined.
Eats points out that stocks and shares will give better long-term results and that an IFA's value lies in persuading people to invest in sensibly organised portfolios.
Paradoxically, he suggests these proposals could make life harder for IFAs, who would have to push harder to convince clients to consider options other than leaving money on deposit.
Holden Meehan managing director Amanda Davidson points out that most IFA clients are higher-rate taxpayers anyway. She says she can see nothing in the proposals that would help her clients and thinks it inequitable not to do something for higher-rate taxpayers. She foresees the proposals leading to a juggling of money between husband and wife to avoid the higher threshold.
Maddison Monetary Management managing director Mark Howard feels the proposals are a vote winner and would not have any distorting effects on the market. He says the £32,000 threshold could be dealt with effectively in various ways and suggests people might want to take pay increases in different forms.
An extension of this is that the Tory proposals could again have an unintended effect. Rather than encourage people into long-term investments for the future, it could encourage a short-term mentality and nowhere would this be more evident than in pensions.
Scottish Equitable pensions development manager Steve Cameron says that while first impressions of the Tory proposals are favourable, he is concerned they could cause market distortion. He says: “Indiv- iduals might think that pensions were less tax-efficient.” He adds that in this particular market, consumer perception is as important as reality.
Autif director of communications Anne McMeehan says: “People might wonder about the benefits of pensions or other products with tax advantages if those can be achieved in the short term.”
Cameron suggests that the Conservative plans could have another effect. “The proposals could encourage people to avoid funding so much for pensions because they could become subject to the higher rate of tax,” he says.
Some in the industry think the biggest beneficiaries are likely to be current pensioners who have made provision for their retirement rather than those who should be looking to do so.
McMeehan says: “It is important to remember these are proposals put forward by an opposition party. I do not think this is a policy that Labour will jump in to steal.”