Budget 2007: Retirement and IHT

By THIS IS MONEY
Updated:

 

Pensioners were given an unexpected boost in today's Budget. They will be allowed to keep more of their own money before income tax kicks in, said the Chancellor.

Tax-free allowance for pensioners under 75 will rise in three stages to £8,990 in 2008, £9,500 in 2010 and £9,770 in 2011. For over-75s, tax-free allowance rises to £10,000 by 2011.

The rate of VAT for certain housing alterations for elderly people will be cut from 17.5% to 5% - the lowest rate available under EU VAT agreements - and is expected to come into effect on 1 July 2007 following discussion with representative groups.

>>This is Money says: These changes are much needed, especially as older people are having to pay more for care in their own homes.

INHERITANCE TAX

Gordon Brown had already announced that thresholds would rise from £285,000 to £300,000 from April, and then to £325,000 over the next two years. Today he announced the IHT threshold will rise to £350,000 in 2010.

>>Expert view: Anne Young, technical director at Scottish Widows: 'While this increase from £285,000 in 2006/07 is to be welcomed, it will still leave many people with a potential IHT problem. Some simple steps can be taken in many cases to side-step or even avoid a charge. It is important that advice is taken in good time.'

>>This is Money says: This is just a sop. The present threshold would be £400,000 if it had kept pace with property prices.

>> Request a guide to cutting your inheritance tax bill

HELP FOR LOST PENSIONS

Mr Brown said he was increasing the budget of the Financial Assistance Scheme by £6bn to £8bn to cover 'every one' of the 125,000 workers who have lost their pensions as a result of their employers becoming insolvent.

The Financial Assistance Scheme offers help to workers who have lost out on their pension because their particular scheme was under-funded when it started to wind up, and the employer is insolvent or no longer exists.

>>Expert view: David Philips, Director of BDO Stoy Hayward Investment Management: 'Extra funding for the FAS will be a huge relief and bring joy to tens of thousands of innocent families who have suffered this gross injustice through the combined failure of their employers and the government to protect them.

'Whilst this is to some extent a confession of the Government's failures, and perhaps an attempt for the Chancellor to curry favour before becoming leader, it is nonetheless a worthy and very welcome gesture.'

>>This is Money says: The fate of workers who had been told their pension was safe, only for their employers to go bust, is now a little brighter.

This announcement has to be seen as a tacit admission that the government's rules failed to keep these company pensions safe.

PENSION TERM ASSURANCE (PTA)

This is the life insurance that is made cheaper thanks to pension-style tax relief on premiums.

Many had taken advantage of changes from last April to make the product more accessible and had swapped their life insurance for PTA and claimed 22% or 40% off their premiums.

But PTA was suddenly thrown into doubt at last December's Pre-Budget Report when the Chancellor said that he intended to close the loophole.

Now the Budget has confirmed the end of PTA.

>>Expert view: Nick Kirwan, Protection Market Director at Scottish Widows, said: 'U-turns like this send out completely the wrong message to consumers about the need for protection. We worked hard with the Treasury to get to an acceptable middle ground position and were confident that we had reached a workable solution to link PTA to a pension. p>So this is a severe blow for consumers who will no longer have any tax incentive to protect their families.

'It's also a severe blow to the industry which has collectively invested and lost around £35m in developing products and systems.'

>>This is Money says: PTA was an example of how not to do tax policy. The loophole was identified by insurers who told the Treasury and HMRC that it would result in thousands of people claiming tax relief.

The Government OK'd the changes nonetheless, only to reverse their decision less than a year later.

Having said that, the revival of PTA was an accident. A quirk arising from the tinkering with pensions that was enacted last year. Nobody asked for this extra tax relief and it is not clear the public will miss it now it's gone.

GUIDE: Pension term assurance

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