Investors Must Keep A Cool Head Amid Budget Mania

Today’s Budget was preceded by dire warnings of pension raids, tax crackdowns and fuel duty hikes that largely did not happen. The giveaways were relatively plentiful, the tax hikes relatively scarce. Taxpayers will be pleased with a turbo-charged hike in the basic rate personal allowance to £12,500 from next year, up from £10,600 today, and the higher-rate allowance from £42,385 today to £45,000 from next April.

Even juicier ISA

Wealthier investors will be celebrating Chancellor George Osborne’s decision to hike the ISA allowance again, increasing it to £20,000 from April 2017, up from £15,240 today. This allows investors to shield even more of their dividend income and capital gains from HM Revenue & Customs. The truth is that few of us can afford to save anywhere near that much each year, so this is a break for the truly wealthy. It will do nothing for lower earners, the ones who need most help in saving for their retirement.

Worryingly, it may also pave the way for the ultimate abolition of pensions. Pre-Budget talk focused on a rumoured pensions tax raid, but all the fuss scared Chancellor George Osborne away from further tinkering. He may return, having now laid the groundwork for a new hybrid ISA/pension, and launch an all-out pension tax raid.

Once in a lifetime

The under-40s should also welcome the new Lifetime ISA, which will hand them a government bonus of £1 for each £4 they save. They can save £4,000 a year, giving them a maximum bonus of £1,000. The money must either be used to buy a first home or saved until age 60, for withdrawal in retirement. You can withdraw funds before then, but will lose the government bonus and all growth on it if you do. You’ll also be hit with a 5% ‘exit penalty’, which is ironic for a Government that has campaigned against pension  exit charges.

The Lifetime ISA gives younger investors a clear incentive to invest for their future and they should grab it with both hands. If saving for the long-term they should ignore cash and stick to stocks and shares, as this is the only serious way to generate long-term wealth.

Eye on the prize

The Budget itself may have been good news for investors, but the pre-match speculation was a disaster. All those rumours about about axing pension tax breaks will have left many ordinary people even more confused about our overly complex pension system, and reluctant to commit their money. It also turned this year’s ISA season into a damp squib, as investors sat on their hands and waited to see what Osborne had up his sleeve. Now it is game on again.

As a long-term investor you have to set aside all the media hype and political fuss. Extended tax-free allowances aside, the Budget is just a sideshow. When all the excitement has died down investors should keep doing what they always do: invest regular sums into stocks and shares, take advantage of market corrections when you can, grab any tax breaks that come your way, ignore short-term losses and hold on for long-term winnings. If you do that you can survive whatever the Chancellor throws at us next.

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