Comprehensive Spending Review – Time for a Personal Review?

The coalition government has committed to addressing around 80% of the structural deficit through spending cuts rather than tax increases. However, the recent Comprehensive Spending Review will still have tax planning implications for many investors.

The most obvious change is for pensions, with the Government equalising the State retirement age for men and women from 2018. It will then rise to 66 by 2020, four years ahead of previous plans. The age for private pensions remains 55 – up from 50 earlier this year – but any private pension will have to supplement the State pension for longer.

Chancellor George Osborne confirmed the National Employment Savings Trust (NEST) will proceed so auto-enrolment for workplace pension schemes starts as planned in 2012. For public sector schemes, the government is to raise the amount payable by employees by around 3%. This all comes on top of changes to the pension rules announced prior to the spending review, which include the annual contribution limit falling from £255,000 to £50,000 next April. The lifetime annual limit on money that can be built up in a pension fund has also been cut from £1.8m to £1.5m and the penalties for exceeding the limit remain onerous, so investors will need to monitor contributions closely to ensure investment growth does not push them towards the maximum.

For the time being, high earners will continue to be paid tax relief on pension savings at their highest marginal income tax rate. The Government is still consulting on plans by the previous administration to reduce the tax relief available on pension contributions for people earning more than £150,000. However, the Chancellor made it clear that business tax rates would remain low, meaning the marked differential with income tax remains and tax-planning opportunities exist for entrepreneurs. This is unlikely to change as Osborne is looking to the private sector to make up the short-fall in employment created by public sector job cuts. However, the January 2011 VAT rise is still on.

The majority of tax incentives for saving all remain – for now at least. The Government has said that ISAs are safe – with contribution limits rising £480 to £10,680 for the 2011/12 tax year – and  indeed is considering a form of ‘Junior ISAs’ to replace the Child Trust Fund. Entrepreneurial incentives such as VCTs are untouched too but the Chancellor stressed he would be tightening up on tax evasion of all kinds. More than ever, investors need to ensure their financial affairs are in order.

Issued by Jane Smith Financial Planning Limited which is authorised and regulated by the Financial Services Authority.

The contents of this newsletter do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you seek advice from a professional financial adviser.

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