happynewyear_banner

Last Wednesday the annual Parliamentary Magic Show the Budget took place.  And back once more to entertain the country was George “Sleight of Hand” Osborne making his seventh consecutive annual appearance.  What new tricks would he have learned we all wondered.  And was there any truth in the rumour he’d been secretly mentored by master illusionist Gordon Brown?  Odd that many of their tricks look similar don’t you think?

Take Simplification.  Did you know it was Osborne who made the Office of Tax Simplification appear… just like that…. in 2010?  Has anybody seen it since?  Over the six years UK tax codes got more complicated not more simple.  Brown a mere 4 years earlier pulled a similar trick with Pensions Simplification.  Now we’ve 8 Lifetime Allowances, a couple of hundred additional complications, and a few million bewildered onlookers.

It had been rumoured George was about to make pension plans completely disappear into the ethers, he’d been at a loss how to perfect the trick but then having stumbled on a Daily Telegraph campaign, he saw how to make pensions suddenly popular and produce billions in tax revenues out of thin air.  Eureka.  Mmm he pondered, how he could raise more tax and make Ian Duncan Smith disappear?  Oh well, one out of two’s not bad.

Now all he has to do is drop the odd hint that Pension Tax Free Cash is possibly to disappear in a puff when you least expect it, and long term serious pension savers will panic out of their too comfortable tax haven.  Despite the best efforts of Equitable Life, sections of the media, Brown, Darling and himself over the last 19 years to scare these folks, too many were still sitting cosily in their freedom from Inheritance Tax and Capital Gains Tax.  Shocking.

The Joker that successive Chancellors played regarding Buy To Let property, encouraging folks to turn away from pension plans thanks to over generous tax breaks had worked pretty well.  Now thousands had fallen for it, time to up the ante, slash the tax relief having enticed enough into extra IHT and CGT.  Great trick that one.

Now it’s time to slash Capital Gains Tax for taxpayers who ignored second properties.  And to woo savers with extra ISA cream next again tax year.  (Youngsters, the under 40’s and over 18’s from next again April will also benefit from ISA cream with added topping, an extra available until they’re 50).  Rabbits from a hat eh?  From a wee suitcase actually.  Clever stuff considering it was Osborne only six years ago who increased Capital Gains Tax for high taxpayers from 20% to 28%.  Now he gets the accolades for reducing it.  Brilliant.

And it’s nice to see him introduce a bit of humour into his magic routine.  Didn’t you just love when he said that the previous Pensions Minister (a Lib Dem) had predicted he’d abolish Tax Free Cash, which he’d decided not to do, but instead he was abolishing the Lib Dems From midnight.  (He’d only been able to saw them in two before).

Now when I was young we were so poor a budget meant making ends meet or spending less than you brought in.  Just as well my Dad worked 7 days.  All I seemed to bring home from school was shame I seem to recall.  Sleight of hand didn’t come into it.  You spent wisely and put aside for rainy days.

To be honest I didn’t pay attention to Budgets until March 1973.  I well remember that one.  Only three months earlier I’d become an IFA.  In that Budget the then Chancellor Anthony Barber for the first time gave small business directors the opportunity to go for the same maximum pension benefits available only to big business directors and staff.  It was genuinely an “Ooh and Ah” moment.  An opportunity to maximum fund for retirement, with full tax relief into what was then a completely tax free growth investment.  Magic.

I read at the weekend an “expert” saying if the “new” ISAs with 25% top ups (available for the under 40s from April 2107) had been available years ago far more people would have been encouraged to save for retirement.  When I started this company in June ’75 I had no pension rights.  I was 28.  Basic rate tax was 35%.  Annuity rates were well into double figures.  A contribution to my pension obtained a mark- up, thanks to tax relief, of 54%!  Into a tax free box.   Tax free cash at retirement and high GUARANTEED income for life.  A no brainer.  And yet today the average pensions pot’s only £28,000??

Every year since, a magician stands up on Budget Day and brings rabbits out his wee case.  One day every year.  Well what I’ve learned since 1973, it’s what you do the other 364 days each year that makes the difference between financial success and mediocrity.  What does worry me about Osborne is his tax raising and “gifts to the next generation”… which dominated his presentation…. comes at what cost?  The Inland Revenue say an extra £3.6 billion tax will accrue from Pensions Freedom.  Smoke and mirrors?  Isn’t tax just being sucked in from future years?  When we get there the cupboard will be bare.  What chance then a future magician will just tax the fortunes lying in ISAs?

Osborne said it was time to ensure Maths is taught to all under 18 yr olds.  Apparently too many don’t understand pensions, investments etc.  Well basic arithmetic is all you need.  Forty years ago I was lucky to be taught The Rule of 72.  Nothing’s simpler than that.  Take the net annual return on your money, divide it into 72, and it tells you how long it takes to double your wealth.  The Bank of England confirmed that the average return on a Cash ISA is 0.81%.  So that’s 89 years rounded up.  Best of luck.  Amazingly despite such dire returns apparently 80% of ISAs are Cash ISAs.

Einstein said the greatest discovery of Mankind was Compound Interest.  That’s a fancy way of saying The Rule of 72.  Use it.  It works.

While I was preparing to start the business in 1975 I found Professor Cecil Northcote Parkinson’s book “The Parkinson Laws” written in 1956.   In it he noted the UK Tax system was designed to tax Income when you’re living and Capital when you die.  So all you needed to do is switch around, creating only Capital when you’re living, and only Income when you die.  Despite the yearly charade of magic Budgets ever since, the ups and downs and rounds and rounds, that’s still the case today.  You just have to have knowledge and patience.  Better than….. reacting every year to Budgets which goes…

“You got me spinnin’ around…. round and round and round and round it goes…. where it stops, nobody knows…. Abra-abra-cadabra…I just want to reach out and grab yuh”    The Steve Miller Band

Alansteel
Author
Alan Steel
Chairman
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This article is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.

Have a question?

To learn more about how we can help with your investment plan, please feel free to contact us
Contact Us