My regular weekend ramble, then it’s on to a list of great reads.
Every morning seems to bring a new personal finance headline these days.
Last week it was high-earning sole breadwinner families and those on excessive benefits who saw their handouts cutback. This week it was the turn of super high-earners, who now face a cap on their pension contributions:
Tax relief on pensions will be limited to contributions of £50,000 a year, down sharply from the current ceiling, which is five times that. However, there had been suggestions that the limit would be nearer £30,000 a year, which would have hit many on relatively modest incomes who had many years of service with their employer.
Higher-rate taxpayers will also be allowed to keep tax relief at their highest rate on pension contributions up to the £50,000 limit. There had been fears that the Government would restrict tax relief to 20pc for everyone.
I think on balance the move is perfectly sensible, even if it is odd coming from a Conservative-dominated Coalition. Liberal Democrat voters should stop bleating and be proud of the difference their party is making to the deficit-reduction balancing act.
As for the £50,000 cap, well the idea of tax relief for pensions is to stop people being a burden on the State in their old age, NOT to enable Fat Cats and Cityboys to stash away absolutely enormous amounts of money free from the tax man’s grasp. The move doesn’t cap the ultra-rich person’s ability to invest for their future, just the tax rebate the State gives them for doing so.
But it would be unwise to be too smug. Only 100,000 high-fliers are estimated to be affected by this new rule (and the FT is already pointing out ways around it) but you don’t have to wait for long for something else to come along to clobber you in the current climate.
I had feared ISA limits might no longer go up with inflation, but the Treasury has clearly decided it’s a cheap middle-class perk, and thanks to runaway CPI inflation it will raise the limit to £10,680 next year.
Currently you can transfer ISA savings into a pension pot at a later date if the rules or your circumstances make it sensible, and pick up 20% or 40% tax relief on the way. But the new £50,000 cap will limit that traffic.
New investors might smirk at the idea of a £50,000 a year transfer being ‘limited’, but money invested in equities can grow like Topsy over time – whatever our recent history indicates!
I also fear the pension cap will hurt small-scale entrepreneurs, who sell their businesses and put the capital gain towards a one-off boost to their retirement pot. Unlike fat cats, they take genuine risks – and they’re the lifeblood of the economy.
Ultimately, the constant fiddling with pensions and ISAs proves the futility of fine-tuning a retirement investment strategy based on current legislation. You simply don’t know how the rules will change.
The best approach is to keep some money in an ISA, some in a low-cost pension (a must if you are offered employer’s contributions – it’s free money), and some cash outside these wrappers entirely.
Oh, and don’t ask who the deficit reduction bell tolls for, because sooner or later it will inevitably toll for thee!
From the money blogs
- Warren Buffett bias – The Psy-Fi blog
- Slow frequency trading – Investor Caffeine
- Using annuities to reduce risk – Oblivious Investor
- The currency vigilantes – Bond Vigilantes
- Four ways to handle a retirement savings shortfall – The Street
- Trading in a bull versus a bear market – The Digerati Life
- We’re entering a family-unfriendly era – Simple in Suffolk
- Peer-to-peer finance – A Grain of Salt
- How to achieve money mastery – Magical Penny
- The 2010 Noble Prize for Economics winners – Weakanomics
- Money Crashers new finance blog rankings – Money Crashers
From the big money sites
- Annual ISA allowance to rise to £10,680 – FT
- Analysts predict bumper year for VCTs – FT
- Meet Mr and Mrs Average – This is Money
- Beware of rolling over utility bills – Telegraph
- Return of gazundering as house prices fall – Telegraph
- Rents soar as first-time buyers struggle – Independent
- Dividends rising, notes a contrarian fund manager – Independent
- This week’s dubious new investment: Cemeteries – The Guardian
- Should UK investors worry about house prices? – Motley Fool
- Studying the rich – New York Times
- Israel’s market versus its 1980s hyperinflation – Business Insider
- Another day, another miss-sold structured product – Bloomberg
- Currency war: America versus China – Flanders / BBC
- Equitable Life compensation to total £1.5 billion – BBC
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