In­vestors fear a ‘Bud­get for the young’

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Will em­bat­tled Chan­cel­lor Philip Ham­mond cut tax breaks for long-term in­vestors to woo younger vot­ers, asks Sam Mead­ows ‘There could be cuts in NI pay­ments for those in their twen­ties and thir­ties’

With the clock tick­ing on Brexit, the Gov­ern­ment is pre­par­ing to un­veil its first au­tumn Bud­get, which will aim to re­pair some of the dam­age the Con­ser­va­tives suf­fered in the elec­tion in June.

Much has been made of the party’s lack of pop­u­lar­ity among young peo­ple – if you’re younger than 47 you are prob­a­bly a Labour voter, ac­cord­ing to YouGov – and the Bud­get will be seen as an op­por­tu­nity to shift the bal­ance.

The pro­posed re­forms to care fund­ing, dubbed the “de­men­tia tax”, were ru­inous for the Con­ser­va­tives’ elec­tion cam­paign and Chan­cel­lor Philip Ham­mond is un­der pres­sure to avoid such a mis­take on 22 Novem­ber. A fail­ure to de­liver could ul­ti­mately cost him his job and heap yet more crit­i­cism on Prime Min­is­ter Theresa May.

Iain McCluskey, part­ner at PwC, the ac­coun­tants, said: “It’s a re­ally dif­fi­cult Bud­get for the Chan­cel­lor. It’s the penul­ti­mate one be­fore Brexit, which makes it very chal­leng­ing. Things like wel­fare cuts are dif­fi­cult with a small ma­jor­ity so he’s re­ally ham­strung.

“We saw how badly the de­men­tia tax went down with Con­ser­va­tive vot­ers. He’ll find it hard to ap­peal to the young and old at the same time. Their needs are very, very dif­fer­ent.”

Mr Ham­mond is con­sid­er­ing tear­ing up green belt planning laws to give a boost to house­build­ing, ac­cord­ing to re­ports, as well as changes to pen­sions and help for stu­dents shack­led to enor­mous loans.

For­mer chan­cel­lor Ge­orge Os­borne com­mit­ted to rais­ing the tax-free per­sonal al­lowance to £12,500 by 2020. Mr Ham­mond has al­ready come un­der fire in an­tic­i­pa­tion of an un­veil­ing of tax breaks for the young at the ex­pense of older peo­ple.

The pol­icy, dubbed a “tax on age”, could mean cuts in Na­tional In­sur­ance (NI) con­tri­bu­tions for those in their twen­ties and thir­ties, pos­si­bly funded by a re­duc­tion in the tax re­lief for older pen­sion savers.

Mr McCluskey said he was in favour of a rise in the start­ing point at which NI con­tri­bu­tions be­gin to be taken. Cur­rently you pay NI at 12pc if you earn more than £157 a week. “Rais­ing the NI con­tri­bu­tions thresh­old is a bet­ter idea and would have more im­pact than in­creas­ing the per­sonal al­lowance, but min­is­ters seem wed­ded to that pol­icy,” he said.

He said an­other rise in the per­sonal al­lowance, the amount you can earn tax-free, was likely. It is cur­rently £11,500 a year but this could rise to £12,000 or more. He also sus­pects the 40pc tax rate could rise from £45,000 to £50,000.

Ac­cord­ing to cal­cu­la­tions by PwC, a £500 rise in the tax-free per­sonal al­lowance would save some­one earn­ing £25,000 around £100 a year. A rise to £12,500 would save them £200. If the higher-rate tax thresh­old rose to £50,000, some­one earn­ing that much would save £1,000 a year.

Tax re­lief makes pen­sion sav­ing an at­trac­tive in­vest­ment op­tion but be­cause it is based on the in­come tax rate of the holder, it has been crit­i­cised for be­ing more lu­cra­tive for wealth­ier savers and al­ways ap­pears at risk ahead of the Bud­get. If you are a ba­sic-rate, 20pc, tax­payer, ev­ery 80p you put into your pen­sion is turned into £1 by the Gov­ern­ment. Higher-rate tax­pay­ers re­ceive 40pc tax re­lief, and so on.

“There’s been talk of re­strict­ing tax re­lief on con­tri­bu­tions for some time but in the past the Chan­cel­lor has steered away from that big de­ci­sion,” said Mr McCluskey.

It has been sug­gested Mr Ham­mond could limit tax re­lief to young savers, scrap­ping it en­tirely for those over the age of 40 or 50. Ac­cord­ing to AJ Bell, the fund shop, scrap­ping pen­sion tax re­lief could cost some savers more than £100,000.

As­sum­ing they re­tire at 65 and en­joy 4pc in­vest­ment growth, cut­ting off tax re­lief for work­ers when they reach 50 would cost some­one sav­ing £500 a month £31,237 over their ca­reers. Savers con­tribut­ing £1,000 and £2,000 a month, would miss out on £62,474 and £124,947, re­spec­tively.

If the cut off was 40 it would have an even greater im­pact. Some­one sav­ing £500 a month would miss out on £64,968.

AJ Bell’s Tom Selby said abol­ish­ing tax re­lief, 60pc of which is paid on em­ployer con­tri­bu­tions, would be in­cred­i­bly com­pli­cated and “take years to im­ple­ment”.

The life­time al­lowance and an­nual al­lowances, which de­ter­mine the amount you can save into a pen­sion, are a more likely tar­get.

The life­time limit has been re­duced to £1m from £1.8m at its peak in 2010-11. Cut­ting fur­ther, to be­low £1m, would be hard to jus­tify.

It would be easier to re­strict the an­nual al­lowance. At the mo­ment this al­lows £40,000 to be saved a year. Low­er­ing this as part of a pack­age aimed at the young could be pop­u­lar.

in­vestors choose to put their money into stocks in­stead of bonds,” said Mr Mould.

How­ever, while the yield is at­trac­tive, div­i­dend cover – which mea­sures the abil­ity of firms to pay div­i­dends from prof­its alone – is his­tor­i­cally low. Mr Mould said ide­ally in­vestors want to see div­i­dend cover of two or more, which pro­vides some safety in the event of a sud­den shock.

FTSE 100 div­i­dend cover is es­ti­mated at 1.6 to 1.7 for 2018, and many of the high­est-yield­ing firms have cover sig­nif­i­cantly lower. As has been seen re­cently with Pear­son,

IT The Life­time Isa, or “Lisa”, was launched in April to help un­der-40s save for a de­posit as well as old age. Cur­rently you can save up to £4,000 a year, which is then boosted by a 25pc go gov­ern­ment bonus, tak­ing it up to £ £5,000. Once opened, con­tri­bu­tions can be made u un­til age 50. The money can o only be with­drawn at 60 or to buy a prop­erty with­out in­cur­ring a hefty penalty – 25pc of the en­tire pot in­clud­ing in­vest­ment growth. Tens of

Prov­i­dent Fi­nan­cial and Ad­mi­ral, when this goes wrong and a div­i­dend has to be cut, it can have se­vere ram­i­fi­ca­tions for the share price.

Mr Bell said: “With all the data we have, we strug­gle to see where the UK is go­ing. By com­par­i­son, we have strong con­vic­tion that Europe and the US have a pos­i­tive out­look. The UK is mixed: low un­em­ploy­ment cou­pled with weak con­sumer con­fi­dence, for in­stance. That’s be­fore you start con­tem­plat­ing the Brexit ne­go­ti­a­tions.”

He added that while a no-deal Brexit thou­sands of peo­ple have al­ready opened ac­counts but ex­perts say boost­ing the an­nual limit would be a vote win­ner.

Mr McCluskey said the age limit could be ex­tended. “First-time buy­ers are get­ting older and ex­tend­ing the age limit to 50 would re­flect that.”

Ditch­ing the early-exit charge would also make the Lisa more at­trac­tive, he added.

Mr Selby said the Gov­ern­ment could en­cour­age more sav­ing by com­bin­ing all the dif­fer­ent types of Isa into one: “Mr Ham­mond could an­nounce a re­view of the rules with the aim of cre­at­ing a sin­gle, sim­ple Isa regime which savers find easier to en­gage with.”

Stu­dents are leav­ing univer­sity with an av­er­age debt of more than £50,000 and many will not pay this off within the 30-year time limit. The Prime Min­is­ter has called for a re­view of the tu­ition fees sys­tem, which could in­clude changes to in­ter­est rates (some of which are 3 per­cent­age points above in­fla­tion) and rais­ing the point at which loans be­gin to be paid off.

Mr Ham­mond’s cab­i­net col­league David Davis has re­port­edly called for stu­dent debt to be wiped, a pol­icy pro­posed by Jeremy Cor­byn dur­ing the elec­tion cam­paign, say­ing it pre­vents grad­u­ates from con­tribut­ing to the econ­omy.

Changes to stamp duty on prop­erty pur­chases which, as this news­pa­per has re­peat­edly high­lighted, is freez­ing the hous­ing mar­ket, would also be pop­u­lar.

Mr McCluskey said a “stamp duty hol­i­day” is a pos­si­bil­ity. This would give first-time buy­ers a win­dow to pay lit­tle or no stamp duty on pur­chases.

Paul Smith, of Haart Es­tate Agents, said: “Stamp duty is hold­ing back a whole gen­er­a­tion of young peo­ple who are al­ready strug­gling to save for a de­posit, and it is time to bring this in­jus­tice to an end.’’

would be bad, it would not nec­es­sar­ily be bad for stock mar­kets, as the pound would fall sharply again, boost­ing over­seas earn­ings. The value of ster­ling will re­main an ever-present fac­tor af­fect­ing UK re­turns, as around 70pc of FTSE 100 earn­ings are from over­seas.

The role of cen­tral banks re­mains im­por­tant too. The money they have pumped into mar­kets since 2008, and rock-bot­tom in­ter­est rates, con­tinue to pro­vide sup­port to stock mar­kets. The re­moval of such stim­u­lus is likely to be han­dled very cau­tiously, but is un­charted ter­ri­tory.

Tough choices: Philip Ham­mond has the tricky task of ap­peal­ing to young vot­ers with­out alien­at­ing the Tories’ tra­di­tional base

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