News
29 - 06 - 07
Welcome to Prime Minister Brown…
After a decade at the treasury, Gordon Brown has finally made it to Number 10.
Over the next few months, we will learn what his real policies are, now that he no longer has to follow his long-term “partner” Tony Blair (remember him?). However, we can have a pretty good idea of what is in store if we look at the past ten years, with stealth tax after stealth tax adding to the overall burden of individuals and businesses. The problem is, of course, that there is simply too much government – and we have to pay for it.
There has been much that appears positive during Brown’s years at the Treasury, including fairly level inflation and relatively low interest rates (thanks to passing management of this aspect of the economy to the Bank of England). But set against this has been a period during which the proportion of GDP taken up by the state has been steadily growing, the money supply is racing ahead and a high-value pound is making exporting difficult (while exports are cheap). No wonder the trade deficit in manufacturing has risen more than eightfold from £7 billion in 1997 to £59 billion in 2006.
But for financial services the biggest changes have related to pensions, where:
The upshot of this is that pension planning has never been so important to clients and prospects alike.
Although the headline £5 billion a year loss quoted above applies to the entire industry, everyone with a money purchase (defined contribution) pension scheme is affected. If you consider a pension fund with £250,000 invested in UK shares generating dividends of £12,500 a year, the failure to reclaim the “tax credit” costs £1,250 every year. Over 20 years, that is £25,000, even without allowing for inflation.
Clients should also consider the impact of falling annuity rates on their eventual income. Although everyone has the option to use “drawdown” (unsecured pension) from age 50 to 74, the maximum income available is limited by annuity rates available; and from age 75, few are likely to opt for ASP, now that the rules on death are so draconian. In any event, many people will still probably opt for an annuity as their funds are too small to make drawdown cost effective.
We are keen to be making strenuous efforts to ensure that our clients maximise their pension contributions if they wish to secure a decent standard of living in retirement.
There has been much that appears positive during Brown’s years at the Treasury, including fairly level inflation and relatively low interest rates (thanks to passing management of this aspect of the economy to the Bank of England). But set against this has been a period during which the proportion of GDP taken up by the state has been steadily growing, the money supply is racing ahead and a high-value pound is making exporting difficult (while exports are cheap). No wonder the trade deficit in manufacturing has risen more than eightfold from £7 billion in 1997 to £59 billion in 2006.
But for financial services the biggest changes have related to pensions, where:
- £5 billion each year has been wiped of the value of funds (as Mr Brown was clearly warned in advance, but chose to ignore) by removal of the tax reclaim on franked investment income – which has also hit equity ISAs;
- Pensions “simplification” has proved anything but; and
- The proposed new Personal Accounts will damage the interests of the lower paid (again the government is aware of this thanks to the efforts of Steve Bee and others, including the Equal Opportunities Commission).
The upshot of this is that pension planning has never been so important to clients and prospects alike.
Although the headline £5 billion a year loss quoted above applies to the entire industry, everyone with a money purchase (defined contribution) pension scheme is affected. If you consider a pension fund with £250,000 invested in UK shares generating dividends of £12,500 a year, the failure to reclaim the “tax credit” costs £1,250 every year. Over 20 years, that is £25,000, even without allowing for inflation.
Clients should also consider the impact of falling annuity rates on their eventual income. Although everyone has the option to use “drawdown” (unsecured pension) from age 50 to 74, the maximum income available is limited by annuity rates available; and from age 75, few are likely to opt for ASP, now that the rules on death are so draconian. In any event, many people will still probably opt for an annuity as their funds are too small to make drawdown cost effective.
We are keen to be making strenuous efforts to ensure that our clients maximise their pension contributions if they wish to secure a decent standard of living in retirement.
