Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Tax treatment on ISAs and SIPPs depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55.
The surprise resignation of Chancellor Sajid Javid and his replacement by rising star Rishi Sunak could not have come at a more awkward time, just four weeks before next month’s Budget.
If we knew little about where the former Chancellor’s fiscal preferences lay, we know almost nothing about his successor’s. The one conclusion we can draw is that the influence of the Prime Minister will be even more in evidence than it has been.
The days of competing fiefdoms in Downing Street, so long a feature of the Whitehall drama, are long gone. What Mr Johnson, informed by his senior adviser Dominic Cummings, wants to see announced on 11 March is very likely what we will get.
Investors should pay attention because Johnson and Cummings are planning a revolution and the Budget is traditionally where we learn who will pay for it.
Making fiscal promises ahead of an election is easy. Delivering on them once the ballot boxes have been packed away again is another matter altogether.
In the run-up to December’s vote, the Government promised two apparently incompatible things. It said it would ‘level up’ our divided country by spending more in the less affluent north and middle. At the same time, it vowed not to increase its three main sources of revenue - income tax, national insurance and VAT.
It probably can’t do both.
Next month, we will get our first real glimpse of how the Government plans to square the tax circle. The Budget will show the direction of travel on tax and spending, even if some of the harder answers are left to this year’s second big fiscal statement in the autumn.
The reality is that we need to raise more money if we want the kind of country we aspire to and have been promised.
Low productivity, high spending commitments and a desire to end and ultimately reverse austerity all point inexorably to higher taxes.
And that is before we even think about the aspirational stuff around healthcare and transport infrastructure. Demographics are not on our side, either. We are ageing as a society, so just maintaining the current standards of social and healthcare provision will cost more in future.
No surprise, then, that the Government is floating unpopular ideas in the press in the run-up to the new Chancellor’s 11 March set-piece.
The highest profile of these are the most unpopular of all - a restriction of the £40bn a year pension tax relief that has made retirement saving such a no-brainer, especially for higher-rate taxpayers, and a ‘mansion tax’ on the most expensive properties.
The latest version of pension reform appears to be focused on limiting tax relief to 20% for all. This would seriously undermine the attraction of saving into a pension for those who have thus far been able to gain 40% or 45% relief on the way in and manage their affairs so that they will only pay 20% on the way out after retirement.
The political logic of these suggestions is consistent with a Government that can thank a new breed of northern, working class Conservative voter for its return to office. But it is not risk-free. Pensions and property are potential red rags to the party’s core Southern voters.
Pension tax reform is a perennial pre-Budget staple. Ever since former Chancellor George Osborne floated the idea in 2015 (and quickly retreated), we have expected some kind of restriction of this most attractive of savings incentive.
The truth is that altering the current system of essentially tax-free pension saving would be very difficult to achieve in any remotely fair way. Doing so without penalising the young and the majority who don’t enjoy a final salary pension will test Whitehall’s finest.
The Government would probably prefer not to go there at all. Even less will they want to start taxing property values - the outcry from asset rich but income poor house-owners will be deafening.
But having rashly boxed itself in with its manifesto red lines on income tax, NI and VAT, it is hard to see how Mr Sunak can balance the ledger on current spending, let alone find the cash needed for long-term investment in the wealth-creating fabric of the country without raising the overall tax burden.
This all matters a great deal to investors for whom tax and inflation are the two hurdles we have to clear before we even start to think about improving our real financial situation.
Some things we can do little about. We naturally have to comply with the law. And so we should - as Warren Buffett once said, ‘pay your taxes and be grateful’. But that doesn’t mean we shouldn’t do everything we can to legally minimise our contributions to the state.
The ISA and SIPP allowances are generous for those not caught by the onerous pension taper applying to the highest earners. Using both annual allowances to the maximum we can afford, and for spouses too, of course, is an obvious first step.
The imminent end to the tax year on April 5th is a key date for both of these. Don’t let it pass you by.
If you are likely to be liable for capital gains tax, too, then consider how best to divide your assets between yourself and a partner, especially if they are in a lower tax band. Start thinking also about how to minimise your family’s tax liability when the inevitable arrives.
Finally, if you are approaching retirement, consider taking advice. The cost could be recouped many times over if you make the right decisions at this crucial point in your financial life. Fidelity’s Retirement Service offers access to retirement specialists with detailed knowledge of regulations, allowances, tax implications and income options.
Don’t forget, too the Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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