MoneyTalk (December 2004)

by Arch Financial Planning Limited

HIGHLIGHTS OF THE PRE-BUDGET REPORT

In this issue we have highlighted those aspects of the Chancellor's Pre-Budget Report, delivered yesterday, that we believe will be of particular interest to our clients and to investors generally.

ISAs

The £7,000 Maxi ISA limit - which had been set to be reduced to £5,000 from April 2006 - will now be extended until the 2009/2010 tax year. The £3,000 Cash Mini ISA limit - which had been set to be reduced to £1,000 - will also be extended until 2009/2010.

This is very good news for investors. However, far too many people are not making use of the benefits of ISAs for long term saving and for producing tax-free income from portfolios of corporate bonds and distribution funds in retirement. If you would like a review of your investment planning please let us know.

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Pension Schemes Earnings Cap

To be raised to £105,600 (from £102,000). The main effect of the pension schemes earnings cap is to set a ceiling on the contributions that can be paid to tax-approved pension schemes. This will be replaced from April 2006 with the new pensions regime being introduced as a result of the Finance Act 2004.

This is simply the normal inflation linked rise. However, there is much to do on the pensions front to make the most of the time before April 2006 when the new regime comes into force. It is also a good time to start a stakeholder pension as stakeholder pension charges are going up by 50% for plans starting after April 2005.

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Income Tax Allowances

* Married couple's allowance is given at the rate of 10 per cent.

These are simply inflation linked rises. If you are retired and your income is likely to be in excess of £19,500 in the next tax year you should be reviewing your investment income now to see if you can avoid losing your 'Age' allowance by having the wrong kind of investment income. Such a loss can cost you tax at an effective rate of 33%. We would be pleased to advise you on this.

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National Insurance Earnings Limits

The Lower Earnings Limit is to rise to £82 per week (from £79 per week) and the Upper Earnings Limit is to rise to £630 per week (from £610 per week). There is to be no change in the rate of National Insurance Contributions for either employers or employees.

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Child Trust Fund

The Child Trust Fund, announced in the 2003 Budget, is a new savings and investment account for children. Its aim is to ensure that all children have a financial asset behind them when they reach the age of 18. The Government hopes that it will help encourage a savings culture for both families and children.

All children born since 1 September 2002, who live in the UK and have Child Benefit claimed for them, will receive at least £250 as an initial endowment; children from lower income families will initially receive £500. There will be no tax on any money earned in the account. Child Trust Fund accounts will become fully operational on 6 April 2005 when it is expected that 2 million Child Trust Fund vouchers will be issued. The Chancellor has now unveiled a plan for a second Child Trust Fund payment of £250 per child, and £500 per low income family child to be made to children on their seventh birthday. Although these amounts are quite small, family and friends can contribute up to a further £1,200 per year to each account.

With the growth of the 'live for today' culture amongst young people, there has never been a greater need for parents and grandparents to try and build up some capital for the younger members of their family. One of the most attractive ways of doing this is to invest £50 plus per month in a decent unit trust. It is even possible at this level to invest in an actively managed unit trust 'fund of funds' portfolio.

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Pensioners

Pensioners over age 70 will receive an additional £50 payment as part of the winter fuel allowance, giving a total of £250. Pensioners aged over 80 will receive a total of £350.

Whilst this is good news in one sense, if you do not want to be waiting with baited breath as to whether you will receive the odd £50 from the Government in your retirement, please talk to us about reviewing your pension planning now.

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Tax Avoidance Schemes

Action is being taken over certain schemes that pay rewards to employees in the form of shares and other securities. These are schemes which enable employers to avoid paying the proper amount of income tax and National Insurance Contributions, particularly in relation to large bonuses. This will have no effect on the vast majority of employers and employees who organise their affairs in a straightforward and ordinary way. In particular, genuine employee share schemes and share option plans will not be affected.

Measures are also being introduced with immediate effect to end abuse of tax reliefs for UK film production schemes and ensure that the reliefs operate as intended.

With all this concentration on tax avoidance schemes it is easy to forget that so many people pay tax unnecessarily. This is particularly true in the areas of Inheritance Tax when passing their estates to the next generation, Income Tax on their investment income and Capital Gains Tax on the sale of investments etc. If you would like to discuss how you might genuinely reduce your tax burden within the law please let us know.

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If you would like to discuss any of the financial planning issues mentioned and you have an Arch adviser, then please contact him or her, otherwise email direct@arch-fp.co.uk or telephone 01483 204600.

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Arch Financial Planning Limited

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