Well-cushioned MPs blind to lifetime allowance needs

We should all be applauding the loosening of rules on Isas and setting up of a personal savings allowance of £1,000.

The latter was the sort of measure that some were calling for decades ago.

At a stroke it will give the benefits of Isas to those who never get around to setting one up.

The simplification of saving is so refreshing compared to the complexity that dogged every measure announced by Gordon Brown.

The simplification of saving is so refreshing compared to the complexity that dogged every measure announced by Gordon Brown

It was he who decided that once money was drawn out of an Isa it could not be replaced. Why, for goodness sake? Surely it is much simpler to monitor the balance of an account than the amount going into and out of it.

The change allowing money to be withdrawn and replaced in the year an Isa is set up makes Isas far more suitable as everyday savings accounts.

The simplification also rights an injustice long believed to exist around savings – that we are taxed when we earn money and then taxed again when we save it.

The next injustice has yet to be tackled – that we are taxed yet again when we die. But perhaps that will be in the Tories’ election manifesto.

Throughout this parliament Isas have become ever simpler. Rules preventing two-way switching between cash and shares have been torn down and the limits raised well beyond the maximum that would be required by most investors.

The attitude seems to be: this is your money, we will make it as easy as possible for you to use it how you wish.

This makes the decision to cut the lifetime allowance on pensions completely inexplicable – a move to punish the thrifty that comes directly from Labour’s songbook and has no place on a Tory agenda.

It all stems from the fact that the politicians, with their cushy, taxpayer-subsidised pensions, have no clue how much it takes to buy a secure income in retirement.

Even a £1m pension pot will buy little more than the national average wage if someone opts for an inflation-linked annuity that will also pay an income to a widow.

The reason politicians do not get it is, I suspect, because the calculation used to decide the underlying value of final salary pensions is unrealistically generous.

If the annual value of a final salary pension were multiplied by a more realistic 33 to come to the underlying value, rather than the current 20, then the politicians who benefit from them might be more inclined to offer a more generous lifetime limit.

___________________________________________________________________________

£1m cap is potty

There have been shrill warnings that the new help-to-buy Isa (already being dubbed a help-to-buysa) could fuel house-price inflation.

I cannot see this. The Buysa is in effect offering upfront tax relief on saving to buy a home, similar to that offered on a pension. But instead it is being dressed up as a bonus.

Saving a deposit will still take time – and it is not going to boost house prices significantly.

The change that is far more likely to boost prices is the punitive £1m cap on pension saving.

Now even more people will be shut off from pension savings at an earlier age.

Someone in their mid-forties with a decent pension pot now is very likely to have to apply for protection.

Inflation increases are unlikely to be enough to stop even a £400,000 pension going through the £1m barrier in 20 years’’ time.

Let us leave aside the fact that it is unreasonable to expect someone to plan to freeze his pension that far ahead.

If he does, where else will he put his money? Well, for a decent income stream and long-term growth, property will remain the choice of many.

Excuse me. I am off to the estate agents.

_____________________________________________________________________________

And to cap it all...

I hate to harp on about it, but what this £1m cap really does is to draw a line under pensions as the sole retirement savings vehicle.

Anyone of modest or better means will have to adopt a mix and match approach using pensions, Isas and property.

Much will depend on people’s tax situation. For example, younger investors who are basic-rate taxpayers may well be better off sticking with an Isa and waiting until they become higher-rate taxpayers before using their precious pension allowance.

But, then again, if they wait too long they may well find that higher-rate tax relief has also been snatched away.