11th May 2015
As Prime Minister David Cameron chooses his cabinet, Hargreaves Lansdown chartered financial planner Danny Cox has listed a five-point plan for the new government to help savers and investors…
There is a gaping hole in the Cabinet where a savings and investment minister should be. The government needs to do more to promote saving and investing, to help people meet their future spending needs, and to provide support for British businesses.
Many people’s first encounter with finances will be taking on a vast amount of student debt, or a mortgage. It is crucial the government takes steps to engrain a saving and investment habit, lest we end up being a nation which simply lives on credit. The lessons of the financial crisis alert us to the perils of this approach, but they will soon be forgotten unless there is a cultural shift towards greater financial prudence.
1. Appoint a Minister responsible for promoting savings and investments
The Government will appoint a Pensions Minister, they should also appoint a Savings and Investments Minister with the responsibility to encourage more people to save and invest. At present only around 20% of the UK population invest compared to around 60% in the US.
Businesses and entrepreneurs rely on investment from our pension funds, investment funds and savings, yet there is a lack of political representation for savers and investors. There is no coherent policy towards encouraging saving or investing, and policies are either non-existent or made up on the hoof.
2. Extend Help to Buy and Flexible ISA to stocks and shares
The new Help to Buy (H2B) ISA, due to launch in October this year, will provide valuable tax reliefs and bonus incentives for savers. However, restricting H2B to just cash ISA limits choice and disadvantages those who want to invest rather than save. This is particularly important for those wishing to save beyond 5 years, where the markets are likely to produce a better return than lacklustre cash.
The same principle applies to Flexible ISA which also should be extended to include stocks and shares ISA. One of the key benefits of ISAs is their simplicity; both cash ISAs, and stocks and shares ISAs should operate under the same set of rules.
We also think the H2B scheme should be extended to a 10 year opening period rather than the 4 years planned. This will give providers more confidence to invest in better products for consumers and help avoid the problems we have with CTFs which are heading toward zombie status.
3. Encourage investment by reforming capital gains tax (CGT)
The introduction of a flat rate of CGT and the abolition of taper relief in 2008/9 simplified the tax but removed the incentive for long term investment. Prior to 1998, indexation relief ensured investors did not pay tax on their indexed gains and subsequently taper relief reduced the rate of CGT paid over time. Investing is good for the economy and good for the investor, and this should be encouraged further through the tax system.
4. Retail investors should participate in taxpayer owned privations
The sale of £4bn of Lloyds shares to the general public, proposed by David Cameron, has an important role in encouraging private investors to save and invest for the future:
Around 9 in 10 company flotations exclude private investors. However the UK government has an opportunity to buck this trend when it comes to the sale of its stake in Lloyds, and indeed in Royal Bank of Scotland further down the line.
5. Extend inheritance tax nil rate band for all assets not just the family home
In their manifesto, the Conservatives pledged to take the family home out of tax by increasing the effective Inheritance Tax (IHT) threshold for married couples and civil partners to £1 million. The way this works is by each individual being given an additional, family home IHT free threshold of £175,000 on top of the standard nil rate band of £325,000.
This policy provides a further tax incentive for property and a disincentive for the elderly to downsize and release equity to support their retirements. Compared to the family home and pensions, ISA savings would be at a considerable disadvantage from an IHT perspective. A fairer incentive would be to increase the nil rate band for all assets and then reinstate annual indexation.