Good news for houses like these. Photo: Carl Court
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Cutting inheritance tax will be good news for a privileged few, bad news for the rest

Cutting inheritance tax will mean happy days for the top 10 per cent, and nothing to everyone else.

The UK’s archaic taxation system taxes income too heavily but wealth too lightly. This acts as a roadblock to social mobility, which is the lowest in the western world.

And George Osborne is about to make it worse. When he unveils his Budget, the Chancellor will announce an increase in the individual inheritance tax threshold from £325,000 to £500,000, fully transferable between couples. No inheritance tax will be paid on a couple passing on a £1 million house to their children.

Only the wealthiest families will benefit. If the inheritance tax threshold were left untouched until 2018-19, it would only affect 10% of people. While cutting it does nothing for those in the bottom 90%, it amounts to a boon for those inheriting houses worth £1 million to £2.35 million (when the cut will be fully tapered off). Someone inheriting a £2 million home will benefit more than someone inheriting a £950,000 home. Exactly how this policy fits into the ‘One Nation’ playbook is not clear.

Osborne once recognised the great structural flaw in the UK’s taxation system. According to In It Together, Matthew d’Ancona’s study of the coalition, Osborne and Nick Clegg agreed a ‘grand bargain’ in 2012: reducing income tax to 40% and introducing a mansion tax in return. But David Cameron had other ideas. “Our donors will never put up with it,” the Prime Minister said before vetoing the idea.

Now taxation is becoming even more dependent on income rather than wealth. The inheritance tax cut will be paid for by reducing pension tax relief for those earning over £150,000; hardly a group many feel much sympathy for, but the upshot will be to prioritise those who inherit money over those who earn it.

None of this is to say that inheritance tax is perfect. It is “a somewhat half-hearted tax, with many loopholes and opportunities for avoidance through careful organization of affairs,” as the IFS-led Mirrlees Review into inheritance tax noted in 2011. On the grounds of equality of opportunity, it advocated instead taxing individuals at progressive rates on the total amount of gifts and inheritances they received over their lifetime. Radical leftism this is not: Edward Heath’s Conservative government in 1972 proposed a similar policy.

Robert Halfon, the Conservative Party’s vice-chair, wants to make the party logo a ladder to symbolise opportunity. Yet the cut to inheritance tax will show no regard for equality of opportunity. Instead, it will entrench a system of taxation that favours those who have inherited money rather than those who earned it. By making property an even more attractive investment for the wealthy, it could lead to house prices rising even more. And cutting inheritance tax also risks reducing economic growth: a Royal Economic Society study three years ago suggested that increasing inheritance tax while reducing income tax could increase growth by creating greater incentives to work.

Eight years after proposing to do so, George Osborne will finally make good on his pledge to deliver on inheritance tax. The party faithful will be delighted. But the risk for the Conservatives is that the combination of £12 billion of welfare cuts with a tax cut for the wealthiest families will exacerbate their image as the party of the rich.

Tim Wigmore is a contributing writer to the New Statesman and the author of Second XI: Cricket In Its Outposts.

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Stability is essential to solve the pension problem

The new chancellor must ensure we have a period of stability for pension policymaking in order for everyone to acclimatise to a new era of personal responsibility in retirement, says 

There was a time when retirement seemed to take care of itself. It was normal to work, retire and then receive the state pension plus a company final salary pension, often a fairly generous figure, which also paid out to a spouse or partner on death.

That normality simply doesn’t exist for most people in 2016. There is much less certainty on what retirement looks like. The genesis of these experiences also starts much earlier. As final salary schemes fall out of favour, the UK is reaching a tipping point where savings in ‘defined contribution’ pension schemes become the most prevalent form of traditional retirement saving.

Saving for a ‘pension’ can mean a multitude of different things and the way your savings are organised can make a big difference to whether or not you are able to do what you planned in your later life – and also how your money is treated once you die.

George Osborne established a place for himself in the canon of personal savings policy through the introduction of ‘freedom and choice’ in pensions in 2015. This changed the rules dramatically, and gave pension income a level of public interest it had never seen before. Effectively the policymakers changed the rules, left the ring and took the ropes with them as we entered a new era of personal responsibility in retirement.

But what difference has that made? Have people changed their plans as a result, and what does 'normal' for retirement income look like now?

Old Mutual Wealth has just released. with YouGov, its third detailed survey of how people in the UK are planning their income needs in retirement. What is becoming clear is that 'normal' looks nothing like it did before. People have adjusted and are operating according to a new normal.

In the new normal, people are reliant on multiple sources of income in retirement, including actively using their home, as more people anticipate downsizing to provide some income. 24 per cent of future retirees have said they would consider releasing value from their home in one way or another.

In the new normal, working beyond your state pension age is no longer seen as drudgery. With increasing longevity, the appeal of keeping busy with work has grown. Almost one-third of future retirees are expecting work to provide some of their income in retirement, with just under half suggesting one of the reasons for doing so would be to maintain social interaction.

The new normal means less binary decision-making. Each choice an individual makes along the way becomes critical, and the answers themselves are less obvious. How do you best invest your savings? Where is the best place for a rainy day fund? How do you want to take income in the future and what happens to your assets when you die?

 An abundance of choices to provide answers to the above questions is good, but too much choice can paralyse decision-making. The new normal requires a plan earlier in life.

All the while, policymakers have continued to give people plenty of things to think about. In the past 12 months alone, the previous chancellor deliberated over whether – and how – to cut pension tax relief for higher earners. The ‘pensions-ISA’ system was mooted as the culmination of a project to hand savers complete control over their retirement savings, while also providing a welcome boost to Treasury coffers in the short term.

During her time as pensions minister, Baroness Altmann voiced her support for the current system of taxing pension income, rather than contributions, indicating a split between the DWP and HM Treasury on the matter. Baroness Altmann’s replacement at the DWP is Richard Harrington. It remains to be seen how much influence he will have and on what side of the camp he sits regarding taxing pensions.

Meanwhile, Philip Hammond has entered the Treasury while our new Prime Minister calls for greater unity. Following a tumultuous time for pensions, a change in tone towards greater unity and cross-department collaboration would be very welcome.

In order for everyone to acclimatise properly to the new normal, the new chancellor should commit to a return to a longer-term, strategic approach to pensions policymaking, enabling all parties, from regulators and providers to customers, to make decisions with confidence that the landscape will not continue to shift as fundamentally as it has in recent times.

Steven Levin is CEO of investment platforms at Old Mutual Wealth.

To view all of Old Mutual Wealth’s retirement reports, visit: products-and-investments/ pensions/pensions2015/