Bonus episode: The questions financial planners are being asked after the Budget... and the answers

0:05Simon Lambert: Hello, I'm Simon Lambert of This Is Money. Welcome to a special After The Budget podcast with Lisa Caplan of Charles Stanley Direct, where we're going to be talking about the big questions that have come up after the Chancellor's speech and what people need to know. The dust has settled on the budget. Well, it's sort of settled on the budget. There's still plenty of rows going on. but whilst Rachel Reeves's speech did at least answer the things that we were wondering about what she was going to say it has left many questions remaining there were a raft of tax rises but then there were also some very big moves that were widely rumoured to happen that didn't so what do people want to know now about the budget and their finances what are the answers to those important questions Lisa you are a financial planner with lots of experience and you spend your days answering people's questions when they need to know things about their finances.

1:02Simon Lambert: How did the build up to this budget compare to others in terms of the questions that you were being asked and the general interest? Hi, Simon. It seemed to me that there was a huge amount of interest in this budget. In previous, well, going back a few years, I was an unusual finance geek and me and my colleagues would gather around a screen and watch the budget with great interest. But the rest of the country didn't seem all that interested. That's not true anymore. There's a lot of interest, a lot of questions, and unfortunately, a lot of overreaction to the speculation that preceded this budget.

1:40As a financial planner, my job is interpreting these sorts of things for people and what it means for them in their situation. And I can only really talk about the rules as they are. I'll tell people there is some speculation, but I can't advise them on the speculation. And I would advise people not to sort of have a knee-jerk reaction. And obviously, the big one here was the tax-free cash. The Chancellor didn't change this. The rules are you can have 25 % of your pension pot up to a maximum of£268 ,275. That is staying, But there was a lot of speculation about that. And some people took their tax free cash.

2:23So as a result, they took it out of a lovely tax enhanced pot. And now it doesn't have that tax enhancement anymore. But hopefully it'll still be invested and still grow. But yeah, a lot of questions about that in the lead up to the budget, less so now.

2:42Simon Lambert: And the other thing that people were also quite concerned about that didn't get a mention in the budget, but is coming down the line and is presumably a big issue for your clients is pensions being dragged into the inheritance tax net. And there were concerns that inheritance tax gifting rules would be changed as well. Do you think that it would be a good idea for chancellors in general to give people more long term certainty on some of these things? So then they're not making those decisions based on speculation that you were talking about there? I agree. That would be really good. Obviously, the Chancellor doesn't want to tie their own hands and future Chancellor's hands.

3:24But it would be good to know that, for instance, tax-free cash would remain. I help people make long-term plans with their money. And that's difficult if the rules keep changing. I was quite relieved to see. I mean, yes, we'll come on to talk about salary sacrifice. But other than that, pensions were, broadly speaking, left alone, which is a big relief because the more you fiddle with the rules around pensions, the more people think, oh, this isn't such a good long-term savings thing. I don't trust it. I'm not putting my money there. and that pensions are an absolute building block for long-term savings.

4:02Simon Lambert: The Chancellor revealed a cut to pension salary sacrifice, which is when people effectively swap some of their wages for their employer paying directly into their pension instead. It saves them national insurance, but it also crucially saves their employer national insurance because they're not paying those wages which they would have to pay employer national insurance on. can you explain briefly what the Chancellor said is going to happen and when it's going to happen it's not going to happen for a while until April 2029 what salary sacrifice is as you described you have a sort of agreement with your employer that don't pay me an amount of my salary I'm going to sacrifice that or exchange that for a pension contribution your employer pays national insurance and you pay national insurance on your salary.

4:51So they won't have to pay that on the pension contribution until 2029. So the employer saves their national insurance they would pay and you save yours. And depending on how much you earn, that could be 8 % for a basic rate and 2 % for the bit over the higher rate, broadly speaking. So you'd save that. You do save that at the moment. They've been very popular schemes. I think the numbers are half of UK companies offer some sort of salary sacrifice and a third of employees or something. You know, it's a fair number that use this. It's a very good way of getting people to save into their pensions.

5:31And particularly people who get bonuses can just put that whole bonus or part of that bonus into their pension. So the whole bonus, I don't know, say you're getting a£10 ,000 bonus, that whole£10 ,000 goes into your pension. Whereas if you were to pay higher rate tax on that, you'd only get£6 ,000 into your pocket. So that's why, that's how it worked. And my concern is that this is going to discourage people from putting extra money into their pension. It's still worthwhile putting your bonus, even after£29 ,000 into your pension. because although you'll pay the national insurance, you're still going to get all of the tax relief.

6:12So you might be saving 2 % on national insurance, but you're saving 40 % on income tax. And that's just simply a much bigger number.

6:20Simon Lambert: And a big question, I think for many of our listeners on the podcast will be around salary sacrifice and the tax traps in the system, because there is a large number of people using this to bring their income down, perhaps because they're having child benefit removed, or even more further up the scale over£100 ,000 where they have their personal allowance removed and face 60 % tax until they hit the 45p tax bracket at£125 ,000. I guess the question from those people is, can I still salary sacrifice this money into my pension? Yes, you can. You can still salary sacrifice, you lose a national insurance.

7:01And you get below the threshold, but you don't actually have to do it that way. You could just make a normal contribution. It's still effective for those thresholds.

7:10Simon Lambert: There was also a surprise 2P income tax rise on dividends, interest and rent. Now, almost everything in that budget had been trailed ahead of time. But when that OBR report landed early, when it was accidentally leaked ahead of time, that was the thing that suddenly jumped out. our editor lee boy suddenly shouted to me they're putting two p on dividends interest and rent you're being asked about when this kicks in and and what it means what are you saying to people it's a higher tax basically you are going to pay an extra two percent on what we talk about is passive income which is a bit unfair perhaps especially if you're a landlord and you've got all that stuff to do and you've got investments to manage it's not like it's completely passive But it's not earned income in the way of salary or wages.

8:00And I think this was an interesting aspect of the budget in that the chancellor has said, you don't pay national insurance on these sorts of income. So to make it more equal, I'm going to put 2 % on those sorts of income. What was rumoured before was that she was going to increase income tax by 2 % and reduce national insurance by 2%. So this is kind of ending up in the same place because she has not increased normal income tax on earned income on earnings. But she has put that 2%, which brings the two closer in terms of total of national insurance and income tax.

8:42Simon Lambert: And it feels as if small investors are being caught up here because they're having it added on to dividend tax as well. Does this make it only more important that people try to get their investments into a tax-friendly wrapper like an ISA? Absolutely, absolutely. ISAs, pensions, paying taxes are drag on investment returns. It is. Those help with that, definitely. Capital gains tax didn't change too much. But I mean, capital gains are paid by people who are getting the sort of income that is getting a higher edge tax. So what I mean by that is, if you sell a property, a second home, you pay capital gains tax, that hasn't gone up, but the rental that second property owners would get has gone up.

9:30Simon Lambert: And certainly for investors, you know, individual investors, you might have long-standing share holdings or fund or investment trust holdings. Things have got a lot tighter in recent years, haven't they? We've now got this increase in dividend tax. We've seen the dividend allowance cut. We've seen the capital gains tax allowance cut substantially. We've seen capital gains tax rates go up. Do people need to think about this a lot more than they used to. I can give you an example of what the result of this is. It used to be that we have people have sort of general investment accounts with us and ISAs with us.

10:09And you used to be able to, okay, I'll take the money out of the general investment account, I'll sell the shares there, and then I'll buy them again in the ISA. Now that creates a capital gain. And it used to be that you could easily get£10 ,000 without too much of a capital gain. But actually, now we've got to be a lot more strategic and careful in terms of what we sell and what we buy so we don't kick off again. I think sometimes you have to think, well, this is a bad share. I'm going to sell it anyway. And there's been a loss, so no capital gain there. But you have to make your decision based on the investment fundamentals, but keep an eye on the tax as well.

10:44Simon Lambert: The other ISA change that we saw was the cash ISA allowance has been or will be, not has been, will be, will be cut to£12 ,000. This was done in a slightly fiddly way. Can you explain to listeners exactly what went on here and when it's going to kick in? From 6th April 2027, the ISA rules are changing a bit. The way it's done is a bit fiddly, but I think I can explain it in a straightforward way. Stocks and shares ISA allowance,£20 ,000, cash ISA allowance,£12 ,000. So there's a difference of£8 ,000. You can use that£8 ,000 to buy a bit extra of stocks and shares. And that's what the Chancellor wants.

11:32She wants to encourage investment. And as she said, and it is true, as a country, we underinvest. Too many people are scared of investing and they're losing out on the long-term growth that you get with investing. I'm bound to say that investments can go up and down, and they certainly do. But over the long term, the ups outweigh the downs, hopefully. It depends when you start and when you finish. But that's the idea of investing. So some people have fairly said, well, I don't want to take the investment risk because I'm losing out on ISA allowance and all the taxes are going up. And yes, that will affect them.

12:09Personally, I hope some people take a better look at investing and try to understand it better. And I help people understand when we talk about risk, are we really talking about opportunity? Because risk is up as well as down and you can have different investment strategies. If you can afford to take a down while you wait for the apps, maybe it's worthwhile giving it a try.

12:34Simon Lambert: Savers can be reluctant to shift to investing. And as you said there, we think a lot in terms of the losses that we can potentially make, whilst also not maybe thinking about the other places in our life where we're perfectly happy to make a loss on something. We buy things all the time. People buy big ticket items. They go out and buy brand new cars or secondhand cars that are guaranteed to lose the money. Yet they will say for the same reason that they're not going to put their money into investments instead of cash. um if someone is sitting on a large pile of cash and i would imagine that this is not an unusual situation for some of your your clients actually both you know older and perhaps you know in the middle of their their financial lives should they be thinking about investing some of that money regardless of what's happening with the isa allowance should they be thinking do you know what actually some of this money that I have seeing in cash could be working harder for me there's certain things that people anybody should should think about and I think maybe we're not talking about people who've got debt I'm not talking about a mortgage or a student loan who had unsecured expensive debt get on top of that pay that off first make sure you've got a nice comfortable emergency fund so that if you suddenly lose your job you don't have to worry about paying in the mortgage or feeding your family, all that sort of stuff.

14:02But once those things are sorted out, it becomes a question that there are two things you really need to think about. Firstly, if your investments were to fall suddenly, what would your position be? And we talk about that as capacity for loss. How much loss can you bear? And that's not an emotional thing. That's a sort of a factual, objective thing. And the sort of person we're talking about here, that's okay. but more often the problem is about their personality, how they feel about risk, sort of in their gut viscerally, how do they feel about investment risk and loss aversion. It's also important because you've got to be able to hang in there, to see that your investments have fallen and stay there and not sell because those investments will go up again.

14:51And people who are very loss averse often sell at the worst possible time. So earlier on in my career, I was talking to a couple who, you know, had this experience. And my job as a financial advisor is to tell them, hang in there. It's going to get better. Look, it goes up and down regularly. And that's an important part of investing as well.

15:13Simon Lambert: One of the things that people often say when they give their reasons for not investing is things like, oh, well, I'm not rich enough yet. I don't have enough money yet. and they don't mean you know i haven't paid off my debts or things like that they mean i don't have a big enough pile of money to start investing yet they might have their rain they've got their rainy day fund but they think i need to get to this bigger pot of money before i do it but with that bigger pot of money obviously comes the the greater risk that if you put it all in in one go and the market falls then you've got a problem and certainly i've seen it quite a bit you know in my years as a financial journalist from talking to people is that often you'll find people who have been very financially successful for example entrepreneurs who've built businesses people who have worked in high-flying jobs and been paid large amounts of money and then managed to save large amounts of money or perhaps have have benefited from substantial share options that have then paid out because they moved on, they paid out, the company got taken over or something, and they end up with a big sum of cash.

16:22Simon Lambert: And we're talking tens of thousands or hundreds of thousands of pounds. And those people quite often find it really difficult to invest, don't they? Yes, I've seen the same. And often the entrepreneurs, although they've had enormous risk in their business, they just don't want to take the investment risk. It's about a loss of control, I think, for them. The ideal scenario is to start small and often, because if you're sort of making regular contributions, it's a way of riding out the ups and downs. And also along the way, you get investment experience, you learn about investing. So start when you're younger, start smaller, and sort of build confidence in the portfolio.

17:06And, you know, hey, presto, one day you'll be sitting on a large portfolio hopefully something that cropped up immediately

17:14Simon Lambert: and actually before the cash isa cut was this suggestion that people would be able to work work their way around this that they could just put cash in their stocks and shares isa transfer stocks and shares isis to cash isas hold money market funds is that the case i've seen some information from the government about this there will be anti-forstalling measures it seems that you won't be able to transfer from the stocks and shares to a cash ISA, which I think is a real shame. And also things that are cash-like, there's going to be a question about whether they are right in stocks and shares ISA.

17:50And finally, any cash that you've got sitting in a stocks and shares ISA. And sometimes people do unintentionally, it's just sort of dividends or whatever are paid and they have a lot of cash in their stocks and shares ISA. We pay interest to our clients on that money. because we get interest on that money, and that interest will be taxed, according to the documents that I've seen. But I would say people often are scared as well, because they don't know how to invest, or what to invest in. And they manage funds available, where essentially you delegate that to a manager, and they pool your money with other people.

18:31These are people with investment expertise and they'll invest your money for you which is great and they also tracker funds which are a lot less expensive than managed funds and they just you know follow the whatever index you pick so you say i don't know what shares to buy in the uk stock exchange i know i'll buy a footsie tracker that way i get a bit of all the shares on the stock exchange when we were talking

18:53Simon Lambert: before the podcast discussing what we've been talking about one of the things that you mentioned is people should avoid thinking about letting the tax tail wag the dog. That's something that often crops up when we talk about financial planning. What do people need to think about there? I was thinking particularly there about pension contributions, and you also alluded to it earlier in terms of, yes, you will pay tax on your dividends. You own a share, you get a share of the profit of the company, and you will pay a little bit more tax on that unless it's in an ISA. It's more important for you to get the right investment, the right share.

19:35And then once you've made that decision, worry about the tax. So it's more important for you to decide, should I invest or not? Should I put money in stocks and shares or in cash? Think about that first. And then afterwards, think about the tax. Let that fit in with your bigger financial plans.

19:55Simon Lambert: finally putting all this together and then moving forwards into the point when we stop talking about the budget which which will eventually happen listeners don't worry it will happen we will move past this budget what would be you know your your key tips for people when they're thinking about their finances and building their wealth over the long term get on with it is my advice i've seen too many people hesitate and dance around it and just get on with it if you need in impetus, I speak to people because it's easy for people to speak to me. And I'll answer their questions and get them going in the right direction.

20:31I can answer an amazing amount of information and questions in 15 minutes. And if I can't, I will point you. That's why I do what I do to encourage people to get moving. Don't leave it too late. Don't regret what you haven't done yesterday, but then get moving with it today. Investings for the long term, the sooner you start, the better.

20:53Simon Lambert: Lisa, thank you very much.