Tories drop another money love bomb on over 50s

Posted on: 31 March 2014 by 50connect editorial

George Osborne ended annuity torture and David Cameron has now said inheritance tax should only e paid by the rich.

money news for over 50s

The dust (some are saying “gold dust”) had hardly settled on the Chancellor’s budget and pension revolution before the Prime Minister decided he needed to share some of the credit and limelight.

The Tory pair are light years away from the battles and animosity that existed between No 10 and 11 Downing Street when Labour’s Tony Blair and Gordon Brown were in office.

But politics is all about perception. After last week’s Budget, George Osborne was hailed as the architect of ending years of annuity torture, and a future British Prime Minister!

So nobody should have been surprised this week when the current Prime Minister, David Cameron, announced his own piece of financial good news.

“Inheritance tax should only really be paid by the rich. Quite a lot of hard-working families, who have worked hard and saved, and put money into their house were being caught by inheritance tax,” he told a meeting in East Sussex.

Savers and investors will not object to these two politicians scrapping for the title of who can be the most generous to potential voters.

It was Osborne, in his days as shadow chancellor, who announced to the Conservative Party Conference in Blackpool on 1st October 2007 that the Tories would raise the Inheritance Tax threshold from £300,000 to £1m when they returned to power.

It earned the Tories headlines, a 62% approval rating (and prompted Labour’s Prime Minister Gordon Brown to declare that his party would address the issue) - but it failed to win the Tories enough votes for an outright victory in the 2010 General Election.

David Cameron has blamed the Liberal Democrats, not the recession, on the failure to raise the IHT threshold above £325,000 (where it is currently scheduled to remain until 2018).

“The ambition is still there. I would like to go further. It is better than it was – and it is something we will have to address in our manifesto,” added Cameron.

It is yet another factor for the individual saver and their adviser to consider after all the changes to pensions.

Some predict a spending-spree and a boom for buy-to-let, already popular, because of the new pension freedom among individuals of a certain age. The Institute of Fiscal Studies has been particularly critical.

Director Paul Johnson told the Treasury Committee this week: “Under current pension rules, as much as £312,500 is completely tax free – never taxed on the way in, not taxed there, and not taxed on the way out,” referring to the 25% tax-free sum that can be taken from a pension pot from the age of 55.

A fellow director at the IFS said the changes had made the tax-free sum “over-generous”.

Pensions minister Steve Webb failed to silence those critics by announcing: “If people do get a Lamborghini (the Huracan model comes with price tag of £165,000) and end up on the state pension, the state is less concerned about that, and that is their choice.”

Mr. Webb later appeared on Newsnight to justify his comments, claiming that as the average pension pot was £25,000, “not many people will be buying sports cars.”

This property spending-spree might never happen. Buying property comes with many extra costs - surveys, stamp duty, product and legal fees, and once purchased, there are the on-going letting and management fees, council tax plus maintaining the property and dealing with tenants.

Not everyone wants that hassle. Investors have put up with it because the pension alternatives have been so poor and unrewarding. Now that Mr. Osborne has changed the pension horizon, many will see buy-to-lets as a less attractive alternative.

As ever, the financial adviser has to deal with what is already in place, what has been promised, what is being promised and what might be promised – and then the pages and pages of technical detail! Politicians’ promises do not have a great track record.

During the recession with banks and bankers being named and shamed, fined staggering amounts of money (this week Santander UK were hit with a £12.4m fine over failures in investment advice) and generally blamed for the financial crisis, the IFA (Independent Financial Adviser) has emerged with reputation enhanced, despite increasing regulatory requirements to remain in the market place.

It is clear that the IFA’s direct contact with the customer, investor, client or saver – a service your friendly bank manager used to provide. Offering specialist financial advice has paid dividends for both parties.

Hidden away in Osborne’s Budget was the fact he was “setting aside £20m to enable savers to obtain free, impartial face-to-face-advice on what to do with their pension pots.”

Early indications are that this money will go to the industry, those currently selling annuities – but it would make much more sense, and lead to genuine impartial advice, if that money was made available to the IFA sector. This is specialist advice that’s already being given by them, could be provided free on a local community basis and could be easily monitored and controlled.

When the Tories made that 2007 promise regarding the Inheritance Tax threshold, they also announced that the family home would be outside IHT estate calculations. Most homeowners, especially those in the South East, would settle for that, rather than an increase in the threshold.

The Office for National Statistics has just announced that the average cost of a UK home is now £254,000 – and a London one is £458,000 (£133,000 above the IHT threshold). This confirms that IHT is a tax on homeowners, especially those living in the south of England and big cities.

If David Cameron genuinely wants to make Inheritance Tax (or death duties), a tax that “should only really be paid by the rich” and not those whose wealth has been earned during their lifetimes – more drastic steps must be taken.

In 2014, it is estimated that one in 20 estates will be liable for IHT – and predicted to be one in 10 by 2019. If the Prime Minister keeps to his promise and ends this unpopular tax, he will almost certainly win over the voters – and keep his Chancellor at No 11!

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