Budget '97: PEPs keep their perks for another two years

Budget and you: SAVINGS

For savers, there was less bad news in yesterday's Budget than feared, but little obviously good news either.

The tax perks of PEPs will remain for now, but in two years this popular investment could be subsumed by a new Individual Savings Account, which will look to give tax benefits for longer term savers and, in particular, to encourage those on lower incomes to save.

The value of personal pensions and many company pensions will be hit by the Chancellor's much talked-about abolition of the tax credit, but higher-rate taxpayers will still be able to get 40 per cent tax relief on money they put into a pension, and the tax-free lump sum available on many schemes is not being hit either.

The Chancellor was also surprisingly lenient on the Inheritance Tax and Capital Gains Tax breaks enjoyed by many. At present, people who make profits on investments - capital gains - enjoy generous tax breaks which will stay for now. But Mr Brown announced a review of the regime, with changes to follow in the next Budget. However there was no mention of any changes to Inheritance Tax - the levy on the assets and estates of the dead - which has been derided as an easily avoidable tax and which was seen as high on the new Government's hit-list.

Philip Warland, director-general of Autif, a trade association representing companies selling the vast majority of PEPs, said the Budget was good for PEPs inasmuch as the tax credit had not been abolished immediately for these investments, as it was yesterday for pension plans. The different treatment of the two increases the attractiveness of PEPs over pension plans.

PEP investors will keep the tax credit - which has the effect of boosting the value of dividends - until April 1999, by which time a new tax-favoured Individual Savings Account (ISA) will be available. Tax-free Tessa accounts will also remain for now. But it is not yet clear whether or in what form either existing tax-favoured scheme will survive after the introduction of the ISA, and that may put some people off investing in PEPs in the interim.

The Government will publish a consultation document on the ISA later this year, with a view to announcing specific proposals towards mid-1998. The only clues at present are that ISAs will be aimed at raising the level of long-term savings and particularly at encouraging those on low incomes to save. Mr Brown noted that at present half the adult population does not save.

By contrast, accountants at Price Waterhouse estimated that the effect of the abolition of the tax credit on the value of some pensions could be significant. For example, for someone with 10 years until retirement, the abolition could mean a pension worth 7 per cent less than expected. But some pension companies instead thought the effect of the abolition would be "marginal".

However, as with the mooted introduction of the ISA, the overall pension picture under Labour remains unclear: there was no talk in the Budget of compulsory pension saving or how state pension arrangements might change.

There were two other moves of apparently lesser importance for savers and investors. The Chancellor said he wanted to get rid of tax-favoured Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) that offered too much in the way of guaranteed returns. Both VCTs and EISs offer generous tax breaks for investing in small businesses and start- ups, which are meant to be about high investment risks.

Lastly, investors in gilts - government bonds - will from next April be able to receive their interest before tax, a move which is aimed at making gilts more attractive as an investment.