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Comments following the Budget

Alistair Darling’s first Budget has been largely neutral, but it has reiterated the Government’s aim of dampening inflation, which tends to hit those on fixed incomes, like the Gregorys, hardest.

The Single Person’s Allowance will rise from £7,550 in the current Tax Year to £9,030 in the next, which should be of some help. The Married Person’s Pension will only rise from £139.60 per week to £145.05, which is not much use to them. On the other hand, the increase in the Winter Payments from £200 to £250 will be of benefit, but only marginally, due to the increase in the energy prices.

If they have not already done so, the stabilisation and simplification of the ISA rules means that they can each shelter from the Taxman £3,600 in Cash ISAs from their online Savings Account. This should make their money go further, as they are aware of the need to protect their capital.

The reduction in the rate of Basic Rate Tax to 20% from 22% helps those on lower incomes, like retirees, but it has to be weighed against the abolition of the allowance taxed at 10%. This simplification of the tax regime does make it more transparent and easier to calculate.

The continued thrust of the Government to ease tax on less polluting vehicles, on a sliding scale from zero to £440 does not help the Gregorys, as Pensioners cannot easily afford to change their cars that often. So if they buy a new low-emission vehicle in the spirit of the Budget, the savings in Car Tax will be wiped out by the necessity of obtaining credit to do so.

Case study

Mr and Mrs Gregory do not have much to look for in the budget, but their finances do merit a few initial comments.

Margaret and William have occupational pensions and believe their stakeholder penseions cannot be touched until they are 75. However, this may not necessarily be the case. In fact they have the following options:

• Take the Tax Fee Cash now and buy an Annuity
• Take the TFC and postpone buying an annuity till age 75
• Release the TFC and annuity income in stages. This will help with replacing cars in the future.

Mr and Mrs. Gregory should consult an Independent Financial Adviser on which option is best for them. As they have expressed a liking for investment, this might be interesting for them.

Mr and Mrs Gregory also hold Premium Bonds. Prizes for these are linked to the amount of interest which National Savings obtain on the Bondholders' money. With the Bank of England probably reducing their rates in the near future, this will affect the amount of prize money.

Therefore, while it is true that if one holds the maximum of £30,000, the annual tax-free return should be 3.6%, which is the equivalent to 4.62% in the hands of a Basic Rate Taxpayer, the combined effects of reducing prize pots and the lowering of the BRT rates make Premium Bonds look attractive only as a bit of fun, rather than the mainstay of anyone's finances.

I recommend that they reduce their Premium Bond holdings and buy income-producing investments instead. This should answer any concerns they might have about Capital Erosion, as they suspect that their money may run out, which is a very real possibility.

As the likelihood of that happening increases with age, Mr and Mrs Gregory should take advice on getting income now, while they are healthy enough to enjoy their holidays, whilst preserving their Capital.

Mr and Mrs Gregory should revisit their Wills and check that they are up-to-date, seeing that they have moved to a smaller property. The proposed changes to Inheritance Tax mean that the previous Nil Rate Band clauses might need to be reviewed in the light of the Budget.

Case study conducted by Paul White, Consultant Belgravia Insurance Consultants