Revenue relents on discounts

Personal Finance

SOME good news from the Inland Revenue. I don't mean its recent admission that perhaps 1.5 million people have the wrong tax code and therefore could be paying too little tax - more likely, of course, it's too much. Although I do recommend checking your tax code, which the article on the facing page should help with, improving your financial lot starts with the basics - not with the investment equivalent of betting on the 3.30 at Newmarket.

No, the good news is that the Revenue will no longer try to tax many discounts offered by financial advisers on personal pension and life insurance policies. The discounts that will now be tax free are those where the adviser rebates some or all of his commission to you, whether in the form of cash, by reducing the premium you pay or as an enhancement to the money you put in.

But it's only some good news. In fact, the Revenue hasn't had much luck collecting this tax. Previously, consumers were meant to declare the value of these rebates for tax. But more than likely, people weren't aware they had this obligation.

The second reason is that the Revenue's U-turn does not apply to discounts offered by advisers on unit trusts and PEPs. A number of advisers - London- based Chelsea Financial Services and Guildford-based Premier Investment are two - now specialise in this discount broking, which can be worth up to 3 per cent of the amount of money you invest. The Revenue says it is still considering the position on these discounts.

The third caveat is that the Revenue will still tax the adviser as though they have taken the full commission. Who cares, you may say. But if the adviser is taxed, he's going to be less inclined to discount. And less inclined to charge fees while rebating all commissions, because that way he faces tax on both "incomes". Fee-based independent financial advice is a good thing - the adviser is under less pressure to sell you something than a commission-based adviser, who only earns if he sells.

IT'S the season for Budget submissions, where interested parties do their special pleading. That of the unit trust companies' association, Autif, stands out for wanting government action to encourage pension plans that involve unit trusts to a greater degree. It says: "The use of the unit trust would . . . minimise one of the great problems the Government faces, in that pensions in general have lost the confidence of much of the population either via the impact of the Maxwell affair or via the problems with personal pensions. The unit trust is a financial services product with a record of the utmost integrity . . . together with the current transparency of charging . . . this should leave both the Government and the consumer entirely confident about the nature of their investment."

Knock out the hype and they have a point. Traditional pension providers have shot themselves in the foot in recent times. A survey out this week by NatWest says the equivalent of more than 1.5 million people say that what they have heard about poor pensions advice has stopped them buying a pension plan or paying more into an existing plan.

PEPs have only become as popular as they have thanks to unit trust companies. And quite a number - but by no means all - now offer pretty good value to the small saver.

Autif's proposal is to take the existing PEP concept and apply it to something which could be called an independent pension account. Compared with existing pension plans, Autif believes it would be simple and cheap and might resemble products available in the US. The word "account" would be more comprehensible to the general public, it says.

I would go one step further. Dump "pension" - it puts many younger people off buying. I'm not sure whether an "IRA" (independent retirement account) would appeal.