Taxing times of pick and mix pensions

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Taxing times of pick and mix pensions
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Labour’s threat to cut tax relief for top earners to fund a cut in tuition fees – that will then primarily end up benefiting top earners – should not surprise us.

It is yet another innumerate policy from the party that sold our gold reserves at rock bottom prices and taxed final salary pensions towards extinction.

But at least they are being honest. The Liberal Democrats also have pension tax relief in their sights – and I would be amazed if the Tories do not.

The golden age of tax-favoured pension saving has been and gone. Retirement saving for the next generation will become much more of a mix and match affair.

The most pernicious aspect of Labour’s proposals is not the reduction on the rate of relief for very high earners, it is the reduction in how much can be saved.

If Labour were to press ahead with plans to reduce the annual limit to £30,000 it would be a massive blow to entrepreneurs and small business owners who perhaps only contribute to their pension when they sell up.

Many small business owners have a once-in-a-lifetime chance to contribute to their pension because they have spent their working lives ploughing their money back into their business.

A one-year limit of £30,000 or perhaps £60,000 over two years hardly makes up for the years they will have missed. And this is a limit that was set at £50,000 not so long ago with flexibility to use previously unused years’ contributions.

But then how many small business owners vote Labour? In fact how can politicians be expected to understand when they are cosseted by their lucrative taxpayer-subsidised scheme.

Even those in final salary schemes who receive a pay rise might be affected. It is very easy for a recalculation of the benefits to send someone through a £30,000 contribution limit. This would affect public sector workers who form a rather greater part of Labour’s core vote.

The message coming through from politicians is that a pension can no longer be your sole method of retirement saving – unless you are a politician with a privileged pension that is.

For the rest, saving towards retirement will increasingly involve a mix of vehicles. Isas will play an ever greater role. This may be a good thing for some who may benefit from having their tax relief when they draw their money.

Lower lifetime and annual limits will doubtless push even more money towards buy-to-let where the tax benefits are so much greater than for many other form of investing.

The message coming through from politicians is that a pension can no longer be your sole method of retirement saving

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Jisas not kidding

Parents who have been forced to watch their children’s Child Trust Fund money wither will be able to transfer to Junior Isas next month.

Scottish Friendly estimates that as much as £8.9bn could be held in these accounts based on 6.3 million children with an average £1,409.

This should have been an option from day one, but tax rules and EU regulations initially created barriers.

Meanwhile, there has been little incentive for those running the child trust funds to concentrate on them, as they were, in effect, lame duck investments.

Nationwide, for example, has been paying just 1.1 per cent on its Child Trust Fund – plus a bonus of 1 per cent if it is topped up by £240 a year.

On its Smart Junior Isa the rate is 3.25 per cent.

Clearly mutuality and fairness do not count for children.

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No comparison

I am consistently irritated by analyses comparing stock market investment with cash returns. These invariably use Bank of England base rates, 90-day notice accounts or sometimes even easy-access cash.

The fair comparison would be with fixed-rate bonds because this is money people were planning to tie up for several years.

I trawled rates on offers over the past 15 years. By picking a decent fixed rate – not the very best – savers could have turned £10,000 into more than £18,000. Using cash Isas then could have achieved more than £19,500.

There is no hindsight because savers know what they will be earning in advance.

This compares with the £13,536 delivered by Halifax’s expensive UK FTSE 100 Tracking fund, the £14,679 by HSBC’s cheaper FTSE 100 Tracker and £13,828 from Scottish Widows UK Growth.

The period was a triumph for those who received sound financial advice, with Invesco Perpetual Income (out of favour in the technology boom) among those delivering spectacular returns that more than quadrupled investors’ money.

Tony Hazell writes for the Daily Mail’s Money Mail Section