12th October 2010
The market for tax-incentivised savings has always been subject to flux, but it looks particularly vulnerable at the moment. Estimates suggest that Isas cost the Government around £1billion, with pensions significantly higher, making them both a potential target for a Chancellor looking for savings.
Of course, any need for austerity needs to be balanced against the need to encourage people to save.
State pensions remain the biggest single item of government expenditure and reducing tax incentives does little to make people self-reliant and reduce the long-term pensions' burden on the Government.
A lot of the heavy lifting on pensions had already been done by the previous government and the coalition has, to date, shown no signs of raising revenue through cutting tax reliefs. Though, of course, the same was true of child benefit before it happened.
Lest anyone forget, here is the Coalition's manifesto.
This article by Tom McPhail of Hargreaves Lansdown highlights current government thinking on pensions contributions – not necessarily a restriction, but a simplification.
From the comments, this would seem a relatively uncontroversial approach.
Koolio says: "The restriction of the annual allowance is something that needs to be done. Many on high salaries simply used this to exploit the tax loophole, especially since older employees in executive roles would be very keen on massive pension contributions."
If change is forecast for pensions, though not necessarily change that need terrify investors, Isas also seem to be safe.
This is in spite of Labour MP Andy Love warning, here on Citywire, that the Government was considering cutting the annual allowance in its spending review.
Finance Secretary to the Treasury Mark Hoban said that there are no such plans for Isas, according to his comments in Money Marketing.
Certainly, the Government appears to be supportive of the Isa structure. It is understood to be consulting over plans to launch ‘junior Isas' as a replacement for Child Trust funds.
These would share many of the same characteristics as Isas, but would be locked in until a child reaches 18. Unlike CTFs, however, the Government would not contribute.
Danny Cox, head of advice at Hargreaves Lansdown says: "We also have to remember ISA is a significant success story and savers continue to suffer with poor interest rates and a reversal will be politically difficult."
He believes that Isas are safe, saying that the majority of the potential tax saving for the Government relates to money already held in ISAs and therefore a reduction in contributions would have little impact for the Treasury's coffers.
Niche tax schemes such as VCTs and EISs are unlikely to merit the cost of tinkering with them. The incentives have already been substantially watered down and investment into the schemes remains relatively weak.
The 50% tax rate may yet boost investment, as would any significant cuts to pension tax reliefs, but there are relatively few signs of it doing so at the moment.
The Savings Gateway has been another casualty of the Government's cost-cutting programme, as the BBC reports here. Nothing has emerged to replace it and getting poorer people to save is unlikely to be a Government priority in the short-term.
In an ideal world, Isas would retain their current generous contribution limits and be extended to allow children's savings, pensions will simplify, but without any significant erosion of the available reliefs and niche savings products will remain in tact.
Then the Government will leave everything alone for a generation, allowing people to plan their savings accordingly.
We can but hope.