25 Jun 2010 | Economy

The Investor's Budget 

Ross Hunter discusses how investors will be affected by the first austerity Budget of the new coalition government.

“Unavoidable. Tough but fair. Everyone will pay something.” That’s how George Osborne described his first Budget as Chancellor. The question is this: how are savers and investors being ‘made to pay’ in this first austerity Budget of the new coalition administration? Here’s our quick summary.

Capital Gains Tax news a mixed blessing

Before the Budget, the most controversial proposal was a rise in capital gains tax, which some observers thought could be lifted to 40% or even 50%. In the end, the change was not as bad as feared: lower-rate taxpayers will still pay 18% on chargeable gains, while higher-rate taxpayers will face a rate of 28%. This will affect sellers of assets but not as dramatically as it could have. Meanwhile, the CGT exempt amount is to remain at £10,100 for this year.

Pensions to be targeted

Most of the government’s pension focus is likely to be on the public sector (and the fact that most of them are unaffordable final-salary schemes). Of course, most private sector employees are now in defined contribution schemes and are paying into their own pensions.

But there are changes afoot that will affect everyone. First of all, the government plans to prevent employers from forcing staff to retire at 60. It has also raised the age at which pensioners must buy an annuity from 75 to 77, while it will consider phasing out the compulsory annuity purchase rule. That’s potentially a big positive for the pensions market; it means in theory that people will be able to leave some of their pension savings to their families after they die.

Other changes to State pensions are mixed; the retirement age is set to rise to 66 from 2016, 10 years sooner than planned, but pension increases will improve, and will rise by the greatest of average earnings, consumer price inflation or 2.5%.

The government also intends  to look at the plans for lowering tax relief for high earners – not to abolish the proposal but rather to review its complexity and find a simpler approach.

Existing child trust funds stay open

Child Trust Funds are to be scrapped from next year. However, existing plans will remain open; friends and family will continue to be able to contribute up to a total of £1,200 a year and the savings can grow tax free.

Conclusion

The Budget delivered severe spending cuts and higher taxes. For investors, that bias towards spending cuts is in their favour; that shouldn’t necessarily be surprising as the State really has to encourage British people to save for their futures. Indeed, there are still attractive incentives to save for the future, whether through pensions, ISAs or existing Child Trust Funds.

Author: Ross Hunter
Ross Hunter is an investment writer in the Institutional Clients Department at Baillie Gifford.