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A Budget for the young needs long-term thinking

17/10/2017

If you are looking for Budget predictions and analysis, please see the following commentary from financial experts at Old Mutual Wealth, including Quilter Cheviot.

Rachael Griffin, tax and financial planning expert at Old Mutual Wealth:

Rachael GriffinA Budget for younger voters

A Budget for the young needs long-term thinking, not electioneering. Philip Hammond is expected to restack the deck in favour of millennials that face unpredictable housing costs and employment patterns. But we shouldn’t forget those in their 30s and 40s, many of whom will also be in a precarious financial position. They are uniquely sandwiched between an older generation receiving gold-plated final salary pension schemes and a younger generation that has benefited from pensions auto-enrolment from an earlier age. As a result they face a pension saving crisis.

The pension system is already hugely complicated and an age-linked system of tax relief would not make things any simpler. Any such reform requires long-term thinking and a period of consultation, and must not be a knee-jerk reaction to a general election.

While the first Budget of a new government is typically one where a lot can be done, the government’s unsteady grasp on power means it’s unlikely that the Conservatives will want to rock the boat too much.  And with all eyes on Britain’s exit from the EU, Government will also have little time for anything else. So it remains to be seen whether the Chancellor has the appetite for major reforms.

If the Chancellor wants to deliver a Budget to help younger people, he should ensure that normal people are able to pass on accumulated wealth to their children and grandchildren without feeling stigmatised or pressured to pay more tax than is necessary. 

Gifting allowance / Main residence nil rate band

If Hammond wants to make things better for younger generations without drastic reforms then he can make simple tweaks so parents and grandparents can pass on wealth to help their loved ones onto the housing ladder.

The annual IHT gifting allowance of £3,000 per child is unchanged since 1981. It would be worth over £10,000 if it had increased with inflation. An increase would allow parents and grandparents to pass on money as a tax-free gift while they are alive to see it benefit their family.

The new main residence nil rate band came into force this year and helps money filter down through generations. But it is intensely complex and our research this year shows that an astounding 70% of people did not understand the intricacies of the new allowance. The government should either drastically simplify the policy, or better yet ditch the idea and simply increase the nil rate band.

Social care

The Conservatives have suffered several u-turns and false dawns on tax policy, and social care in particular. The Budget offers a chance to set the record straight, by not only giving a new timeline for the Green Paper, but also reminding people that the paper will offer a series of policies for consideration.

The Green Paper will probably look for a two-pronged approach to help the baby-boomer generation who don’t have time to accumulate the wealth needed to pay for care, and the younger generations, who can steadily build that wealth over time – perhaps through some kind of auto-enrolment system. 

Child benefit

Unfairness in the tax system is often associated with the current child benefit rules, which can result in higher income households receiving the benefit while those with less money don’t get any help. It is an area that is ripe for reform and simplification. At the very least, the progressive withdrawal of the benefit should be removed.  

The benefit is tapered where one person earns between £50,000 and £60,000 a year and is removed completely at £60,000. But two parents earning £45,000 each, for example, are still eligible as the benefit is based on individual earnings not household income.

Families caught in the £50,000-£60,000 taper also must complete a tax return. And parents who opt-out of this complicated system need to register for National Insurance credits as they won’t be building up state pension entitlement.

  

Jon Greer, head of retirement policy at Old Mutual Wealth:

Jon GreerPension tax relief

The cost of pension tax relief now totals close to £54bn annually. This includes both income tax relief and employer national insurance exemptions. That is a huge investment in our future prosperity, and we hope the Chancellor will recognise the value in helping workers achieve a prosperous retirement.

Nonetheless, there are still lingering concerns that the Chancellor may chip away at the tax break. David Gauke has offered savers some re-assurance by ruling out ‘fundamental’ reforms to the system,  pension taxation really sits with HM Treasury rather than the Department for Work and Pensions.

Government could further reduce the annual allowance on contributions, perhaps to free up funds to help younger generations. It has already tumbled from £255,000 in 2010, and reducing it again would further restrict contributions.

A more radical option would be to curb the employer national insurance exemption. The estimated cost is around £15bn a year on latest figures, although this figure should be taken as a broad estimate. For example, it is based on an estimate of how much would be raised if both employer and employee NICs were levied on the employer contribution. Whatever the true cost is it will continue to go up as minimum contribution rates under auto-enrolment increase in 2018 and 2019. Cutting this relief would reduce the cost of tax relief at the expense of business rather than individuals. Although over the long-term some of the cost may be passed on in the form of lower pay.

Higher rate tax threshold to £50,000 and personal allowance to £12,500

The Conservatives committed in their manifesto to increase the personal allowance – the amount we can earn without paying any income tax at all – to £12,500 and raise the earnings threshold for higher rate tax of 40% to £50,000.

The latter is a particularly notable increase and would cut £1,000 a year from the tax bill of someone on a £50,000 salary. But with relatively little wiggle-room in this Budget, and the opportunity to phase-in increases between now and 2020, the Chancellor may leave the existing thresholds untouched on this occasion.


Jane Goodland, responsible business director at Old Mutual Wealth:

Jane GoodlandFinancial capability

The Tories made a manifesto promise to create “breathing space” for people strangled by debt. Recent ONS figures show we have to dig deeper to pay the bills, harming our overall well-being.

Government may put forward proposals to relieve debt pressure on families. But ultimately this will only treat the symptoms, rather than the root cause.

Young people going into the world of work and higher education are ill-equipped to navigate the financial system. Research by the Money Advice Service shows only 41% of 16-to 17-year-olds are able to correctly read a payslip and 18% are unable to correctly identify how much was in a bank account when looking at a bank statement.

Better financial education would help people avoid problem debt manage their finances. The government needs to fund financial education for all, particularly upcoming generations, who are currently faced with the prospect of being the first generation to grow up less well off than their parents. 

 

Richard Carter, head of fixed interest research at Quilter Cheviot:

Richard CarterEconomy

We believe the main issue with the Budget is that GDP growth forecasts are set to be revised down by the OBR as productivity has remained disappointingly low. This will leave Chancellor Phillip Hammond very little room for manoeuvre despite the fact that recent tax receipts have actually been quite strong. Many Tory MPs would like Hammond to ease austerity measures, increase public sector pay and also somehow plan for the possibility of no Brexit deal but the public finances probably don’t allow it. We expect a no-frills Budget with limited economic impact - the market’s focus is likely to remain squarely on the progress of negotiations with the EU. 

For more information contact

Tim Skelton-SmithOld Mutual Wealth02380 916 99807824 145 076tim.skelton-smith@omwealth.com
Michael GlenisterOld Mutual Wealth020 7778 963807469 144535michael.glenister@omwealth.com

Notes to editors:

Quilter is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow.

On a ‘go forward basis’, Quilter oversees £ 111.6 billion in customer investments (as at 31 March 2018).

It has an adviser and customer offering spanning: financial advice; investment platforms; multi-asset and single strategy investment solutions; and discretionary fund management.

The business is comprised of two segments: Wealth Platforms and Advice and Wealth Management.

Wealth Platforms includes the Old Mutual Wealth UK Platform; Old Mutual International, including AAM Advisory in Singapore; and the Old Mutual Wealth Heritage life assurance business.

Advice and Wealth Management encompasses the financial planning network, Intrinsic; Old Mutual Wealth Private Client Advisers; discretionary fund management business, Quilter Cheviot; and Old Mutual Wealth’s multi-asset investment solutions business.

The Quilter businesses will be re-branded to Quilter over a period of approximately two years following separation from Old Mutual:

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  • The UK Platform to Quilter Wealth Solutions
  • The International business to become Quilter International
  • The Heritage life assurance business to Quilter Life Assurance
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On 19 December 2017, Old Mutual Wealth announced that it has agreed to sell its Single Strategy asset management business to the Single Strategy Management team and funds managed by TA Associates. The proposed transaction is subject to customary closing conditions, including regulatory approvals. 

Quilter is part of Old Mutual plc, a FTSE 100 group that provides investment, savings, insurance and banking. For the year ended 31 December 2017, Old Mutual reported an adjusted operating profit before tax of £2.0 billion. For further information on Old Mutual plc and the underlying businesses, please visit the corporate website at www.oldmutualplc.com.

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