What Budget 2015 means for you (assuming George survives the election)

George Osborne has laid his cards on the table with his final Budget of this government. John Stepek explains what that means for your money.


Has George Osborne done enough to sway voters with what could be his last Budget?

It's not long until the election.

So maybe we shouldn't be surprised that chancellor George Osborne's final Budget of this government was little more than an extended party political broadcast.

And I suppose that's understandable. After all, a lot of what he announced yesterday could be reversed or changed entirely if he doesn't put the legwork in to win in May.

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Still, after the fireworks of last year's Pensions Freedom' announcements, yesterday was a bit of a damp squib.

So what does it all mean for you? (Assuming George is still hanging around come 8 May.)

Budget 2015: taking potshots at Labour and wavering voters

Yesterday, George Osborne stood up and made a lot of jokes (most of them pretty funny to be fair) at Labour leader Ed Miliband's expense. In between, he talked up Britain's recovery, and took a whole lot of little potshots aimed at either disarming critics of the Tories, or charming wavering voters.

So farmers considering voting Ukip got some tax relief. Northern English voters looking at Labour got a nod to regional devolution and the growth of a northern powerhouse'. Wavering SNP voters in Aberdeen got tax cuts for North Sea oil producers.

For anyone who thinks the Tories are soft on the rich, there was a rise in the annual bank levy. And for anyone worried about yet more hysterical talk of the cuts', there was a slowdown in the rate of spending reductions (my colleague Matthew Partridge covered the public finances in more detail).

But from an investor point of view, there was little in this Budget to rattle you. We'll start with the bad news. The reduction in the Lifetime Allowance (LTA) was probably the biggest disappointment. The size of pension pot you can accumulate before you get taxed on the excess was cut yet again from £1.25m to £1m.

I don't have any issue with restricting the amount of tax relief you can claim on a pension. At the end of the day, the point of encouraging people to save in a pension is to try to make sure that they earn enough so that they aren't forced to depend on the state in their old age.

So, as my colleague Merryn Somerset Web has pointed out several times, the state should be incentivising you to save up roughly enough to generate an annual income in retirement in the £20,000 area (in today's money).

Tax relief over and above that is unnecessary. Particularly for a cash-strapped nation which views a vague promise to start paying off some of the national debt within the next five years as an achievement.

But there are two irritating things about doing it this way. The LTA makes planning pretty tricky. Your chances of hitting it depend on your investment performance, which is of course, very hard to predict. This might not matter so much if the excess in the pot was taxed at a standard rate, but in fact it's charged at a rather punitive 55% (assuming you take it as a lump sum rather than an annuity). So it's better to avoid breaching it if you can.

That means that these constant cuts to the LTA are pretty off-putting for pension savers. The chancellor tried to offset this by promising to index the LTA to the consumer prices index from April 2018 suggesting this is the last cut. But it's clearly the tool of choice for restricting pensions tax relief.

And this is the other irritating thing about it. The LTA is sneaky. £1m sounds like a lot of money. It is but in the context of a lifetime, it's not as much as it sounds. As Tom McPhail of Hargreaves Lansdown points out, if you wanted to get an all-singing, all-dancing annuity (one with death benefits and inflation linking) when you turned 65, £1m would currently buy you just £26,750 a year.

The thing is, Osborne has done a lot of good on the pensions front. (See our free report for a full overview on the Pensions Freedom Day changes, if you haven't already downloaded it.)

It's a pity that electoral pragmatism means he can't resist fiddling. As we've always pointed out, it's just another reminder that the biggest risk to saving in a pension is political risk. You never know what stunt the government even a relatively investor-sympathetic government like this one is going to pull next.

This risk reduces the closer you get to retirement (because there are fewer Budgets to go before you take your pot!), but it's always worth being aware of. It's one good reason to split your long-term savings between Individual Savings Accounts (Isas) and pensions.

A few bonuses for savers and a wildly cynical housing market gimmick

Beyond that, there was a fair bit of tinkering at the edges. There was a ludicrously cynical nod to the youth vote with the Help-to-Buy' Isa. The government will give first-time buyers £50 for every £200 they put in one of these Isas, up to a total of £15,000 (ie £12,000 from the buyer and £3,000 from the taxpayer).

This is pretty pointless. In London, £3,000 is a drop in the ocean of the deposit needed it won't touch the sides. In areas where it might make a slight difference, it'll just be added to asking prices. But it's a frighteningly naked affirmation of just how important the UK housing market is electorally.

Savers won't have to pay interest on the first £1,000 of savings interest (£500 for higher-rate taxpayers), which is a nice bonus but hardly life-changing. And a flexible Isa will allow savers to take money out and put it back in again within the year without losing any of the tax-free allowance. Again, it's unlikely to be life-changing for most.

In short, there wasn't much to get your knickers in a twist about here. The Budget's real significance this year is in whether or not it makes a coalition/Conservative victory more likely or not come May. And for that, we'll just have to wait and see.

But whatever happens, we'll be making sure to keep you up to date on the implications for your finances. So if you're not already a subscriber, sign up for MoneyWeek magazine now and get your first four issues free.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.