With belt-tightening on the cards to counter Britain’s enormous deficit, we look at how to protect your wealthNina Montagu-Smith
Consumers should prepare for a “great squeeze” over the next five years as the new government attempts to deal with Britain’s £163 billion deficit.
The election may be over, but we still do not know the scale of public spending cuts and tax rises that will necessary to repair public finances.
All the parties have pledged to cut spending but only a fraction of the cuts needed has been specified, said Capital Economics, the consultancy — suggesting further cuts or tax increases will be required. Jonathan Loynes, its chief European economist, said: “The general election marks the beginning of a new and difficult phase for the UK economy.
“The next five years will be defined by an extremely painful fiscal squeeze, sluggish economic growth and very loose monetary policy [low interest rates].”
We look at areas that may be hit by the squeeze and identify steps you can take to protect yourself from the worst.
1 REALISE CAPITAL GAINS
Capital gains tax (CGT), now 18%, is a likely target for the new government, said Richard Mannion at Smith & Williamson, the accountant. The annual CGT allowance — £10,100 this year — may also be slashed or frozen.
“The current gap between a fixed rate of 18% CGT and a top rate of income tax of 50% means it is very likely the CGT rate will increase next year. Many taxpayers will no doubt be rushing to finalise sales of properties, businesses and other assets to lock in to the 18% rate before the tax year ends on April 5, 2011,” Mannion said.
Even if you have used your CGT allowance, it may make sense to crystallise gains now at 18% rather than wait for CGT to rise.
You can no longer sell shares and buy them back the next day to realise gains — a procedure known as “bed and breakfasting”. You must now wait 30 days before buying back, but Danny Cox of Hargreaves Lansdown, the adviser, said there are other tax-efficient ways to do this.
With “bed and Isa”, for example, you may sell holdings, transfer the cash into an Isa then buy them back. This means you pay no tax on the first £10,100 of gains and tax at just 18% on the rest. Thereafter, there is no tax to pay within the Isa. You can invest only £10,200 a year in an Isa.
Additionally, you can do a “bed and Sipp”, in which you buy back the holding in a self-invested personal pension. Cox said: “This counts as a pension contribution and therefore attracts tax relief. A £1,000 bed and Sipp has £250 tax relief added, a valuable boost to your pension planning. Some higher-rate taxpayers can claim a further £250 via their tax returns. Again, all future gains and income on funds in the Sipp will be protected from tax.”
The maximum you can bed and Sipp is 100% of your earnings, up to £245,000, or £3,600 if you have no earnings.
2 MANAGE INCOME-BEARING ASSETS PROPERLY
Mike Warburton at Grant Thornton, the accountant, said: “The Conservatives are fundamentally against high tax rates, but do not expect them to abolish the 50% rate any time soon. Even so, I do not expect it to last the whole parliament, so people with their own businesses may prefer to store up profits inside the company and avoid paying out dividends.”
Cox recommended transferring income-producing investments into tax shelters such as Isas and Sipps, before sheltering those geared towards capital growth. He also suggested that high earners should transfer income-bearing assets to lower-earning spouses.
Alternatively, products such as National Savings index-linked certificates pay one percentage point above inflation, free of tax. The retail prices index stands at 4.4%, so the interest rate is 5.4%, which equates to 6.75% gross for a basic-rate taxpayer, 9% for higher-rate payers, and 10.8% for a super-taxpayer, said Cox.
3 LAST CHANCE SALOON FOR PENSION CONTRIBUTIONS
Tax relief on pension contributions has already been withdrawn for those earning more than £130,000 and experts widely expect further squeezing — possibly by reducing tax relief to 20% for everyone.
Patrick Connolly at AWD Chase de Vere, the adviser, said: “Those who can benefit from higher-rate tax relief should look to maximise pension contributions while they can. Also, people should take advantage of salary sacrifice if this is on offer.”
Currently, non-taxpayers can make contributions to pensions and attract tax relief, and you can take out pensions on behalf of your children.
Cox said if the weekly child benefit of £20.30 was saved into a pension for a child until they reached 18, with the added tax relief, the fund would be worth £640,000 by the time they reached 65, even if no more contributions were made after 18.
4 GIVE IT ALL AWAY
Accountants fear the scope of inheritance tax, now levied at 40% above £325,000 (£650,000 for married couples), may be extended. One way to do this would be to change the allowances or the potentially-exempt transfer rule, which allows people to give gifts free of IHT provided they live for seven years after. Everyone can also make gifts of £3,000 each a year free of IHT, and any number of £250 gifts to different individuals. If you gift assets, you cannot continue to benefit from them.
5 PROTECT YOUR INCOME
Economists expect job security to deteriorate in the great squeeze, and a worrying survey from British Insurance shows that four in five people have no safety net in place to cushion the blow of unemployment and instead intend to rely on family, savings and State benefit.
HSBC announced last week that it would offer free unemployment cover for all new mortgage customers who take out one other type of cover. However, advisers said that income protection cover would generally be more helpful as unemployment cover pays for a maximum of only 12 months.
Income protection for a non-smoking man aged 30 requiring a benefit of £1,250 a month, payable after three months without income and rising with inflation, costs about £38 a month. If you want to add unemployment cover, the premium rises to £75.39 a month.
6 CONSIDER HEALTH INSURANCE
The NHS will come under severe financial pressure, according to Andrew Tripp of the Association of Medical Insurance Intermediaries. “Rationing is a genuine reality,” he said.
Few people have health cover despite widespread reports of overcrowding, waiting lists and infections in NHS hospitals. While 6m people have medical cover, most obtain it via their employers, and only 1m hold individual policies.
Which?, the consumer group, said 86% of customers go direct to insurers. If you want guidance from an insurance broker, the commission is high. Insurance is likely to cost £100 or more a month but you can cut costs by taking out inpatient-only cover or by having a high excess (the amount you pay towards a claim).
For example, a couple aged 58 in central London would pay £458 a month for fully comprehensive medical insurance from WPA with a £500 excess, or just £44 a month if they choose a £5,000 excess with WPA’s XS Health policy.
7 MAKE LARGE PURCHASES NOW
Advisers widely expect Vat to rise from its present 17.5%. Connolly said: “Those considering big purchases such as cars, domestic appliances or building works may benefit from buying now.”
Warburton added that the government may also consider putting up the taxes on “sin” products such as tobacco, alcohol and betting. “Perhaps you should stock up your wine cellar in anticipation,” he said.
8 DO NOT DISCOUNT INFLATION
While most economists expect interest rates to remain low, inflation could return in the medium term because of the amount of cash that has been pumped into the economy.
When it comes to inflation-proofing your investments, Connolly said you could select a range of assets that have the potential to outperform inflation over the medium to long term.
Suggested funds to hold within an investment portfolio include PSigma Income, M&G Global Leaders, Cazenove European, Threadneedle American, JPM Emerging Markets, M&G Property Portfolio, Fidelity Moneybuilder Income and Schroder Strategic Bond.
9 DO NOT DELAY YOUR ANNUITY PURCHASE
The return of inflation would ordinarily be good news for annuity rates because they are based on gilt yields (which tend to rise in line with inflation). However, advisers said there are good reasons why you should buy an annuity sooner rather than later.
Tom McPhail, pensions adviser at Hargreaves Lansdown, said the most recent high point for annuity rates was in late August 2008, at which time a 65-year-old male with £100,000 could buy a level income of £7,855 a year. Now he could expect to receive only about £6,480, and rates are expected to keep falling.
Billy Burrows, an annuities expert, added: “It doesn’t matter what the colour of government is, inflation will probably return to haunt those on fixed income.
“It is more important now than ever to look at ways of inflation-proofing your pension, if not by inflation-linking, then via investment-linked annuities.
“It is unlikely that investors will be any better off by deferring their annuity purchase.”
The Annuity Bureau, the adviser, said the best income available for a man aged 60 with a £100,000 fund is £6,180 a year from Saga. In April 2009, the best was £6,440 a year from Norwich Union.
10 THINK ABOUT YOUR LONG-TERM CARE
A cross-party commission has been set up by parliament to determine a sustainable way of funding free care for elderly people at the point of need, but it will not report back until 2016.
Care annuities, where you pay a lump sum in return for an income, are paid tax free as long as the income goes direct to a residential care home. It is often possible to negotiate a reduction in care home fees, or a guarantee that they will not rise in the future, as the managers know they can rely on the income.
Providers of care annuities include Partnership and Axa. You will need a lump sum to buy the annuity — the average is £86,000.
from times online
