Our 4-point battle plan to protect your life savings
A GOVERNMENT headed by Jeremy Corbyn may be a nightmare many middle-class households are currently refusing to contemplate.
But it is a bad dream that one day soon could well become reality. Yet for those prepared to act now, there are some straightforward steps you can take to protect yourself and your family. Our advice: don’t dither, act now... MAXIMISE YOUR PENSION PAYMENTS
LABOUR has yet to come clean on what changes – in reality cuts – it will make to the way people are currently incentivised to save into a pension. Indeed, as Jason Hollands of wealth manager Tilney says, its 2017 manifesto was ‘eerily bereft’ of any plans.
But it is unlikely Corbyn and McDonnell will leave things as they are. Indeed, Labour has form when it comes to meddling with pensions. Remember Gordon Brown’s £10 billion-a-year tax raid on pension funds that he announced as soon as Labour came into power in 1997? It was a move not mentioned in the party’s Election manifesto and one that then went on to play a big part in undermining many pension schemes provided by employers – with some not being able to pay the pensions promised to workers. Given that Corbyn’s overriding priority is to reduce social inequality, it is nigh on a certainty that he and McDonnell will meddle with pensions like Brown did. This time around, it is likely Labour will restrict the ability of many workers to build half- decent retirement funds by reducing the tax relief boost currently available.
It will probably do this by removing the right of 40 per cent tax payers to enjoy higher rate tax relief on pension contributions. This is an uplift that currently means that for every 60p they would otherwise get in taxed income, they can divert £1 tax-free into their pension. By contrast, basic rate taxpayers currently only enjoy 20 per cent tax relief – so for every 80p they would otherwise get in taxed income, they can divert £1 taxfree into a pension.
Under Corbyn, all savers are likely to get the same rate of tax relief on contributions irrespective of whether they are a basic rate, higher rate or additional rate taxpayer. It could well be a flat 20 per cent.
Tom Selby, senior analyst at financial firm AJ Bell, says a Corbyn-led Labour government represents an ‘existential threat’ to pension tax relief for high earners. Charles Calkin, a financial planner at James Hambro & Partners, says higher rate relief is ‘doomed’.
Tilney’s Jason Hollands agrees. He says: ‘It is easy to see how tempting it might be for Labour to move against higher rate relief on pensions.
‘After all, even the Conservatives have flirted with this idea – with Chancellor of the Exchequer Philip Hammond describing higher rate relief as “eye-wateringly expensive”. Under Corbyn, whose mantra is “for the many, not the few”, higher rate relief looks extremely vulnerable.’ Yet Selby does believe Corbyn will need to think carefully before axing higher rate relief.
He says: ‘ An ideologically driven attack on pension tax relief would be ill-advised given under- saving for retirement remains one of the biggest challenges facing society today.’
A curtailment of tax relief may not be t he only restriction imposed on our ability to save for old age. Labour could well reduce the maximum annual amount that
can be saved into a pension, currently set at £40,000 (including any employer contributions).
In the interests of so- called egalitarianism – code for envy and vindictiveness – it could also shrink the amount that can be shielded in a pension (the lifetime allowance) without tax charges applied to any excess. This currently stands at £1,055,000.
Selby adds: ‘ In his desire to redistribute wealth by attacking pensions, Corbyn should note that the lifetime allowance is a big issue for many public sector workers in attractive defined benefit schemes where final pensions are based on a mix of earnings and years of service.’
Pointedly, he adds: ‘It is open to question whether Corbyn would want to stoke a fight over this issue with trade unions given their prominent roles in securing his election to leader of the party.’
Even the right of retirees to take a slice of their pension fund as tax-free cash – currently set at 25 per cent – could be curbed although this measure would be met with widespread outrage. But don’t rule it out. With t he most extreme Left-wing government in British history we are in uncharted territory.
YOUR BATTLE PLAN:
The message is plain and simple. If you have any spare cash and are a higher rate taxpayer, you should attempt to direct as much money as you possibly can into a pension – before Corbyn cuts up rough. Although the new tax year just started – yesterday – savers should bear in mind that if they use this year’s £ 40,000 annual pension allowance, they can then sweep up any unused pension allowances from the three previous tax years, starting with the earliest (so, the tax year starting April 6, 2016) and setting any of these contributions against this year’s income tax liability.
For those on £ 150,000- plus a year, pension options are limited because of the so-called tapered annual allowance. This reduces their annual allowance from £40,000 to £10,000 dependent on how much income they earn above £150,000.
There are also contribution restrictions if you are aged 55 and over and have already taken advantage of ‘freedom’ rules – introduced four years ago – to access money from a pension.
Consider opening a pension for a non-taxpaying partner – or even your children. You can put £2,880 into a plan and receive basic rate tax relief worth £720. If in doubt, seek independent financial advice.
Hollands adds: ‘ If you are a higher rate taxpayer, use your pension allowances while you can – and before Corbyn gets his hands on them.’ Make a note in your diary: ‘Top up pension’.
THINK ABOUT BANKING YOUR CAPITAL GAINS
WEALTH creation is anathema to Corbyn and McDonnell. So it is unlikely that the current benign capital gains tax regime will remain for long under Labour.
Anyone realising gains on shares or investment funds – outside an Isa or pension – is exempt from the first £12,000 of profits in the current tax year.
Gains above this amount are taxed according to whether they are a basic ( 20 per cent) or higher/additional rate (40 or 45 per cent) taxpayer. The rates are 10 per cent and 20 per cent respectively.
Given Corbyn’s abhorrence of wealth, it would at a minimum look to align capital gains tax rates with income tax rates.
YOUR BATTLEPLAN: Anyone sitting on sizeable capital gains from shares should consider taking some profits while tax rates remain favourable.
Any profits could then either be banked or alternatively used to boost contributions into tax-efficient savings such as pensions and Isas, thereby protecting it (hopefully) from Labour’s grasping claws in the future. Under an arrangement known as ‘bed and Isa’, it is possible for investors to sell shares held outside an Isa – and then immediately repurchase them inside an Isa.
There will be charges, including stamp duty and potentially capital gains tax, but it means more of an investment portfolio sits inside a taxfriendly wrapper in future. Again, hopefully protected from Labour.
TRANSFERRING ASSETS TO A PARTNER
MOVING assets between married couples and civil partners does not trigger any tax charges such as capital gains. As a result, it represents an effective way of protecting wealth from tax – and Corbyn. By transferring assets to a partner who is paying a lower rate of tax, overall tax bills can be reduced through effective use of both the taxfree personal savings allowance and the annual dividend allowance.
For basic rate savers, £ 1,000 of annual savings income is exempt from tax. The allowance is cut to £500 for higher rate taxpayers and is nil for additional rate taxpayers.
The annual tax-free dividend allowance is £2,000 with any surplus dividend income taxed at 7.5 per cent (basic rate taxpayers), 32.5 per cent (higher rate) and 38.1 per cent (additional rate). Again, a tempting target for Corbyn.
YOUR BATTLE PLAN: Transferring savings to a spouse is simple. With most banks and building societies, it can be done online or at a branch. Similarly, shares and investment funds can also be transferred, usually with little cost incurred. So, if a higher rate taxpayer has £ 120,000 in savings accounts paying 1 per cent fixed interest, they will earn interest this tax year of £1,200 – £500 of which will be taxfree as a result of their annual personal savings allowance. This will result in a tax bill of £280 – 40 per cent of the £700 excess.
But if the higher rate taxpayer moved £ 70,000 of their savings into their spouse’s name, who is a basic rate taxpayer, then the deposits would escape tax altogether.
This is because the £50,000 remaining with the higher rate taxpayer would now generate annual interest of £500, within their £500 tax-free personal savings allowance. The basic rate taxpayer meanwhile, would receive £700 annual interest, comfortably within their tax-free personal savings allowance of £1,000.
The same transferring strategy can work effectively with shares. Take a higher rate taxpayer who has a £120,000 investment portfolio which generates three percent annual income of £3,600.
Under the current dividend tax regime, the first £2,000 is tax-free with the surplus attracting tax at 32.5 per cent – so a £520 tax bill.
But if half of these investments – £60,000 – were to be transferred to a spouse who pays basic rate tax, there is no tax bill as both now receive annual dividend income of £1,800 – within their individual tax-free £ 2,000 annual dividend allowances. They are £520 better off.