Money Box - Saturday 11 November 2000

THIS TRANSCRIPT WAS TYPED FROM A RECORDING AND NOT COPIED FROM AN ORIGINAL SCRIPT. BECAUSE OF THE RISK OF MISHEARING AND THE DIFFICULTY IN SOME CASES OF IDENTIFYING INDIVIDUAL SPEAKERS THE BBC CANNOT VOUCH FOR ITS COMPLETE ACCURACY.

Tape Transcript by JANE TEMPLE

MONEY BOX

Presenter: Paul Lewis

TRANSMISSION 11th NOV 2000 1200-1230 RADIO 4

Pre-Budget Statement

Will the Distinction Between Independent and Tied Financial Advisers be Scrapped?

Count Me In

Winter Fuel Payments

ANNOUNCER: And the time is just past four minutes past twelve - and we're just about ready to join the team at MONEY BOX which is presented by Paul Lewis.

LEWIS Hello and welcome to MONEY BOX. Today we look behind the Chancellor's pre-budget statement and unpick Gordon Brown's promises on pensions, savings and tax. Chris A'Court is with me today:

ACOURT Yes Paul, I'll be looking at whether you can get a refund on your car tax, winter fuel payment, and what will happen if you put too much into tax free savings?

LEWIS We also ask is the City watchdog leading us into trouble and if you were asked the change from a fiver when you've spent £2.54 - would you do better than this?

WOMAN It's £2.65 - 68, 66.

LEWIS First though someone who I hope is better at arithmetic than that - the Chancellor's pre budget statement on Wednesday - it was more like a draft election manifesto than a quick tour around the country's finances - pensioners, motorists, savers, carers, people looking for work, businesses, all got promises of more money and the Chancellor managed to pay off 28 billion pounds of government debt. Now as we often say on Money Box if it sounds too good to be true, it probably is, and it's certainly left some of our listeners confused. Dennis rang from Norfolk:

DENNIS I feel that while I'm reasonably happy with what the Chancellor's done, there's a lot of things he's done that people don't fully understand. I think he's made it rather complicated, and I don't think they know whether they're entitled to certain benefits or not.

LEWIS So today on Money Box we're going to put to the test some of those promises and starting with pensions - the bare bones sounded good : £5 a week more for people claiming a pension on their own national insurance contributions, - another £3 a week for married women claiming on their husband's and a further inflation busting rise in April 2002. There's also a big rise in the guaranteed income that pensioners can claim, but first the new big idea on pensions. It's called a pension credit, and I asked Social Security Secretary Alistair Darling just what it meant:

DARLING It works in two different ways, so if you take for example a pensioner who'd retired on nothing more than the basic state pension in 2003 that'll be worth about £77, so the first thing we would do is to raise their income up to £100.

LEWIS So that's like the minimum income guarantee at the moment?

DARLING That's right - the system is designed to ensure that if you save a bit of money and your income's less than £135 a week we will top up the amount you've saved by giving you an extra credit, so that for every £1 you've saved you actually get 60p help and then that's gradually tapered out as peoples' incomes increase.

LEWIS You're putting means testing at the heart of pension plans, but at the moment it's not working is it? - your huge take up campaign has not resulted in many people actually claiming benefit?

DARLING Well it has actually. Nearly 600,000 have responded to the take up campaign - that's more than we were expecting. Of those, about 60,000 have now been successful in getting claims.

LEWIS That's only 10%

DARLING I know because we're still processing the applications - the point I was going to make is that of the ones who've not been successful nearly all of them have not been successful because either they've had too much money in the bank or they have got too much of an occupational pension. Now it's precisely that problem the pension credit is designed to deal with. Now the first point you ask me about is the whole question of means testing. The majority of people who work are assessed for tax -you know whether they fill in a form every year or not they're assessed for tax. The system that we're proposing is this. When you retire at 65 we need to work out how much your basic state pension is and that's based on your contributions. At the same time we'll do an assessment to see whether someone's eligible to pay tax, whether someone's eligible for the minimum income guarantee and whether or not they've got savings which entitle them to the credit. After that, unless your circumstances change we envisage you having that assessment which will roll on throughout your retired life.

LEWIS So are you saying that everybody when they claim retirement pension at pension age will have to go through this assessment to see if they're entitled to the minimum income guarantee, the pension credit?

DARLING No I don't envisage compelling everybody but what I do say is that people who think they might be eligible can have this one off assessment made, but the key thing in all this is to make sure that firstly we eradicate pension poverty once and for all - we're the fourth biggest economy in the world. We shouldn't have pensioners living in poverty so we need to do more for those who need help most. But secondly and crucially we need the credit to reward saving as well as making sure for those pensioners who presently pay tax we take further steps to take them out of tax in the way that I announced earlier this week, and it's the most fundamental change in the Social Security system for some 50 years.

LEWIS Alistair Darling. Well with me is Mervyn Kohler head of public affairs at Help the Aged. Mervyn is this really the most fundamental change in Social Security for 50 years?

KOHLER It is a very radical change indeed Paul. It is driving forward the government's policy of helping the poorest pensioners. It's doing so of course at a cost of bringing about 5 million pensioners into a paper chase to actually top up their income. The pensioners credit was an essential idea if the minimum income guarantee was to be carried on forward. It's going to mean real money up to about £14 for a single pensioner or so depending on how many savings you've got. It'll come in only after the next general election in 2003 so .it's going to be a highly political issue during the election campaign and it will as I say benefit something like half our pensioner population.

LEWIS But it'll only benefit them if they claim and many of them are very reluctant to do so aren't they? -we've seen that with the current system that Alistair Darling was saying some of them are still in the pipeline but they've only got 60,000 new claims out of half a million who could be entitled?

KOHLER The take up of this benefit is going to be absolutely crucial - it looks very complicated and I don't know how easy it's going to be for people to understand. A clever system but is it right? - it's going to depend very much on how its implemented.

LEWIS Well we're going to have to wait and see till possibly 2003 - Mervyn Kohler thanks for talking to us and it's not just pensioners with savings who'll benefit from the Chancellor's changes. He announced new limits that will apply to individual savings accounts. The current limit of £7,000 and a £3,000 of that in cash will be kept for the next 5 years - originally that limit of £3,000 cash was due to fall this coming April to £1,000 and for the first time younger people will be able to open on of these tax free savings accounts, but with me to explain these changes and others is Alan Warner, the director of IFA Douglas Deakin Young. Alan, it is good news for savers knowing these new limits so early?

WARNER It is indeed. After all that's an increase from the £5,000 that was originally announced - £7,000 a year until April 2006 - well that's quite a generous increase.

LEWIS And 16 and 17 year olds - a lot of the press comment has been there's not much point in this cos so few of them pay tax - there's not much point in them having an Isa in the first place?

WARNER Well I think that's fair comment. I think there will be limited take up - there are said to be what 100,000 16 and 17 year olds paying tax - of that lot I wouldn't think that many will take up Isas.

LEWIS Now also it's not just Isas - the new tax free savings accounts - it's also Peps - there are still five and a half million people with the old personal equity plan accounts -we're having changes to those?

WARNER Yes there two significant changes here. The first is that general and single company Peps are being merged. Now that's very good news for people with substantial holdings in single company Peps where they have one company share and if they're to sell their company share they can only buy one new company share, so for people with large holdings, the holdings have done well, that's good news, they can now sell and diversify.

LEWIS And also probably people who've done badly -we've actually had a letter from Amanda, a Money Box listener in Wilsthire. She bought a Marks & Spencer single company Pep thinking Marks & Spencer can't fail. But now with the company's declining fortune she feels what's left of her money is trapped?

AMANDA I paid £3,000 for it then it's now worth £1800/1900 5 years later - I would like to put the money into another single share that's going to perform a little better for me. They won't and can't offer me any other single share option - I either stick with them and therefore I have to sell it.

LEWIS So Alan, Amanda is trapped by the current rules, but the new rules you're saying will help people like her?

WARNER They will indeed. There are 2 points here - first she's got what's called a corporate Pep - so she's trapped with Marks & Spencer shares. The new legislation will enable her either to switch to a new company share by transferring elsewhere, or to a general Pep in an investment trust, unit trust, a collective investment scheme.

LEWIS And of course she wants to find another share that'll do better - that's perhaps not the best way out is it?

WARNER No she's probably better to switch to a general investment trust altogether.

LEWIS Alan Warner thanks very much for talking to us. Not such good news though for people who've broken the rules on Isas - they're complicated and it's easy enough to do but they're going to be penalised. Chris A'Court you've been delving deeper to find out what happens?

ACOURT Yes Paul. First a reminder of what the rule are: you can only have one maxi Isa investment or 3 mini Isas within a single tax year and invest up to £7,000. But we now know there are around 85,000 investors who are in trouble because they either didn't know or ignored the rules - perhaps aiming for more tax free savings than the government allows. Most commonly the rule breakers will have taken out a maxi Isa and one or more mini Isas too within the same tax year.

LEWIS So what's the Revenue going to do about these people?

ACOURT It's saying we're going to close down your illegal accounts - take tax from any interest that's built up in those accounts, and return the rest of the money to you. And higher rate tax payers will have to pay another slice of tax for their self assessment forms.

LEWIS And if you to have too many Isas - how are they going to decide which of the ones are closed? ACOURT If the first Isa you opened was a maxi one then any minis will go and if you opened a mini first then the maxi will go, but if one of the Isas up for closure is an investment in a unit trust or similar product then it may be allowed to remain open. It just won't be tax free investment anymore.

LEWIS Okay, well complicated rules - thanks Chris. The Revenue has opened a help line to advise Isa rule breakers and details of course will be on our web site and the Radio 4 help line - I'll give you those numbers at the end of the programme. Well one of the nasty surprises lurking in the small print of the Chancellor's statement was as big increase in National Insurance contributions for people earning £30,000 a year or more. National Insurance which pays for state pensions and a number of other benefits now costs us more than VAT - 60 billion pounds this year. Now with me to look at the tax changes is Angela Lazda of accountants Haworth Clark Whitehill. Angela, National Insurance first, but what's Gordon Brown done exactly?

LAZDA Well he's raised the upper limit which is - which is the ceiling on which employed people pay contributions - they pay them at 10%. The result of this is as you say if you earn more than about £30,000 a year then you're gonna be faced with maximum increase of £150.80. However there are some winners. These are people at the other end of the pay scale - if you earn from next April no more than £87 a week, then you won't pay any national insurance contributions at all which is a savings of £57.20.

LEWIS And of course a saving of £57.20 at that level - that's more important than at the expense of £150 at the other? And he's done that by bringing the level of National Insurance now right up to the level of tax so you pay them - you start paying them both together now don't you?

LAZDA Yes

LEWIS And of course people are complaining about this understandably enough, calling it a hidden tax, but it is due isn't it to the rise in the basic pension because these levels are fixed according to the level of the pensions that are paid?

LAZDA I'm sure it is - yes you could say it's redistribution of wealth

LEWIS Yes that's a very old fashioned term, we haven't heard that for a while. But nevertheless an extra £150 - £3 a week for higher paid people and also childrens' tax credit - this is a new thing which starts in April isn't it?

LAZDA Yes that comes in in April - it's supposed to replace the married persons' allowance but then we didn't actually have it for the tax year we're in now.

LEWIS The married couples' allowance ended last April and was a year's gap and now families with children get a tax allowance next April - what's that going to be?

LAZDA It's - it's worth £442 but higher rate tax payers don't qualify for it or qualify for a reduced amount. Some people feel it's extremely unfair because you can have a couple who both earn say £19,700 each - they will get it - but anyone who earns twice £19,700 won't.

LEWIS So if the higher paid partner earns above the - or pays higher rate tax they don't get this tax relief or it's phased out - I see. And so that's £442 - that's £8,50 a week and that's regardless of how many children you have?

LAZDA Yes

LEWIS And there's also some changes promised in pensioners' tax allowances: married couples' allowance particularly because they still or some people still get the married couples' allowance?

LAZDA Yes if - if the older spouse is aged less than 75 but was born before the 6th April l935, then they are entitled to the married couples' allowance which next year 2001/2 will be £5,365 but you only get tax relief at 10%.

LEWIS So some improvements for pensioners' tax and finally employee share options - something that I think most people find particularly complicated - has it been made simpler or easier by the pre budget?

LAZDA I wouldn't say it's been made simpler but growing companies will be able to issue more enterprise management incentive share options to more employees - there was a limit on 15 key employees and now there's ? a limit by virtue of the value of the shares you can issue which is no more than 2.5 million pounds which will be okay for most companies.

LEWIS Okay so encouraging employee share ownership. Angela Lazda thanks for talking to us from Haworth Clark Whitehill. The Chancellor also announced savings on road fund licenses - that's car tax, the disc we all buy - it'll benefit millions of motorists £55 off - Chris, you've been getting more on how this will work?

ACOURT Yes Paul, Gordon Brown said that anyone who's the registered owner of a car with an engine size of 1500 cc or below will pay £55 a year less for road tax. He'd previously announced that any cars of 1200 cc or below would have lower rate road tax, but this means now that a third of all cars on our roads qualify for this reduced rate, so if you own one of these such as an escort of a polo it'll cost you £100 a year rather than £155.

LEWIS And he also said which surprised me I must say - it would apply from November this year, so can you get a refund if you've already forked out for it?

ACOURT From November 1st he said, but there's no facility for getting a refund now. What will most likely happen is that you'll get the refund in the form of a credit when you renew road tax again, and if you're taxing the car in the next few months you won't get the reduced rates either, because it only comes in officially after the full budget next March, so existing road tax charges will apply until then. A tip Paul if you're due to renew car tax before next Spring, you might consider taxing for only 6 months rather than the full year - that'll cost £82.25 - that way you'll take some savings now - some again later and maybe have some extra for Christmas.

LEWIS Thanks for that Chris. Well there are more changes lurking in the small print of the pre-budget - the way we're sold pensions and investments could be about to change radically. At the moment there are two sorts of financial advisor - independents who have to find their clients the best product from across the whole market and tied agents - that's normally banks and insurance companies who are only allowed to sell their own products. Under plans announced on Wednesday the industry expected some minor changes, allowing banks and other big financial companies to sell the products of half a dozen providers, but Radio 4 has been told by a director of the City watchdog - the Financial Services Authority that the distinction between independents and tied agents may simply be scraped, leaving a free for all in the sale of financial products. Christine Farnish is Consumer Relations Director at the Financial Services Authority?

FARNISH We've done a very careful study over the last few months at the request of the Treasury to really see whether or not the current polarisation rules as they're called are restricting competition and whether they're still in the interests of consumers. And our overall conclusion is that yes they are restricting competition, and we can't see any real consumer protection reasons why they should be kept.

LEWIS So we're not going to have 3 kinds of agent - a tied, an independent as we have now and then this sort of hybrid in the middle - we're going to have no polarisation at all so when you go to an advisor you simply won't know whether they're looking at the whole field or just their own products or just half a dozen products?

FARNISH Well let me say first of all that we haven't reached any firm conclusions yet and obviously there's going to be a full consultation process, but certainly one outcome could be that yes you would have a full range of status of advisors, but you would know what they were selling, and you would know which bits of the market they were trawling because we will have very, very clear status disclosure requirements, and that's the further work we're doing at the moment to make sure that we can get those status disclosure requirements in a form that consumers really can understand.

LEWIS Well I think even the term might confuse people and certainly now the evidence you have is that they don't understand it isn't it? - so how can they be expected to understand something that's more complicated?

FARNISH It won't be more complicated. One of the reasons why we are reviewing the current arrangements is absolutely as you say, they don't understand them very well.

LEWIS Don't you think though that this will lead simply to the end of the independent financial advice sector which is a small sector - that they have very little financial muscle and they'd be faced with these huge financial institutions relieved from the burden of only being able to sell their own products who would simply drive them out of business and that will ultimately be to the detriment of consumers?

FARNISH I don't think that no. I actually think that independent financial advice is becoming more and more recognised as a valuable product in its own right by more consumers. And the world's getting more complicated, standards of living are going up, more consumers are actually making provision for themselves and have the ability to invest, and of course independent advice is more likely to be able to give consumers you know a full range of offers than- than other sorts of advice?

LEWIS Well then why don't you insist that all the financial services providers become fully independent advisors and then we could be sure we would all get the best advice wherever we went?

FARNISH We want to let the market find its own level if you like. We don't think it's necessarily appropriate anymore for the regulator to be dictating the sort of structure the market should have.

LEWIS But isn't that what you're there for? - you're there to protect consumers. You're not there to say okay let competition do its job?

FARNISH Well of course we're there to protect consumers and that's one of the reasons why whoever gives advice to consumers is required to follow our conduct of business rules. We need to balance the requirements of consumer protection against those of encouraging competition and market innovation.

LEWIS Christine Farnish of the Financial Services Authority. Well with me is Paul Smee who's director general of the Association of Independent Financial Advisors. Paul, did Christine Farnish go further than you were expecting?

SMEE Much. I think Miss Farnish is in grave danger of pre-judging her own consultation and we will be seeking clarification from the FSA, that when they talked about a consultation next year across a wide range of options that's what they meant. We don't want anything pre-judged.

LEWIS And if they do go finally for the option that she was describing of really abolishing all these distinctions how will that affect independent financial advice?

SMEE Well I suspect a lot of independent advisors will go on with their clients because that is - that is the best option for those - those people. It's very nice to have Miss Farnish's endorsement of independent financial advice although I think she's going to make it a lot more difficult for people to get advice, and I think even more so, she is in risk of leading investors to get advice which they think is independent but in fact is not.

LEWIS Paul Smee thanks very much for talking to us. Well if buying financial products can be confusing one reason could be that many of us are very bad at mental arithmetic. A moray poll done for the BBC found that more than one in five of us couldn't work out the change from a £5 note and nearly half of us couldn't calculate overtime pay or the interest on a loan. I went out into the streets of London this week to see if the survey was right. If you have £5 and you buy something that costs £2.54 how much change should you get?

WOMAN £3 - no it's £2.65 - 68, 66

LEWIS If you go in a shop with £5 and you buy something and it's £2.54 - how much change do you get?

MAN £2.46

LEWIS You're working - you're paid £8 an hour - you work 2 hours overtime and you get paid time and a half - how much will you earn?

MAN 24

WOMAN Maths was my worse subject but you can ask me - you'll probably find I don't know.

LEWIS Okay if you've got £5 note - you buy something it's £2.54 - how much change do you get?

WOMAN £2.64?

LEWIS Is that your final answer?

WOMAN Yes I'm probably wrong.

LEWIS Shoppers in London's Shepherd's Bush on Thursday seeming to confirm the findings of that poll. Well it was done for the BBC's Count Me In campaign which is designed to encourage parents to help their children with arithmetic and with me is Sally Kirkwood the co-ordinator of the campaign. Sally, one in five can't work out the change from a £5 note - how surprised were you at that?

KIRKWOOD Unfortunately not that surprised at all. A recent government report pointed out that roughly half of us would struggle with the maths that an average 10 year old is asked to do and a good - a good - the percentage is right - a good 20% will have real problems with the change which is why we do tend to thrust a fiver at the shop keeper.

LEWIS Indeed. And of course this is serious for us because we may, people maybe fooling us, tricking us or just accidentally making mistakes that we don't pick up on so it could be costing us money?

KIRKWOOD Absolutely it could. If you're not in the position to check what the pizza man is asking you when he turns up at your doorstep how are you going to be in a position to check your bank statements or your bills even?

LEWIS So what's the Count me In campaign doing to try and help people?

KIRKWOOD From this week 2000 centres around the country are offering the opportunity for adults to brush up on their maths skills. One of the good messages about maths at the moment is that the way that our children are being taught is a lot more sensible, a lot more practical, a lot more based on the tips and tricks that people actually devise to actually get over their maths problems. And there's a really good opportunity for adults perhaps to be a little bit more - a little bit less self conscious about their problems with maths. I think an awful lot of us fell apart rather when long division appeared on the time table.

LEWIS And where are these centres?

KIRKWOOD They're going to be run at colleges, libraries, all sorts of places around the country and there should be one pretty well close to everybody with 2000 on offer.

LEWIS And there's also a website and there'll be details of that at the end of the programme. Sally Kirkwood thanks very much for talking to us. I have to say one of the 8 year olds we interviewed got both the questions right almost immediately. Anyway the Chancellor's parting shot on Wednesday was a surprise boost to the winter fuel payment which is currently awaited by people over 60. He said instead of getting £150 pensioner households will get £200. Chris, when do people get that cash?

ACOURT Well the £200 cheques start going out on Monday as Gordon Brown said in his speech but it'll be a while before most people receive them - there are 11 million to write, so it's a big job for the DSS. Don't panic if you don't get it by the end of next week - if you had a winter fuel payment in past years and your circumstances haven't changed, then they'll guarantee you'll get it before Christmas. There's nothing more you need to do.

LEWIS We should stress though that this payment is £200 for each pensioner household not each pensioner?

ACOURT Yes most married couples where both people are pensioners don't get £400 - a husband and wife living in the same home get a cheque of £100 each and it's the same where pensioners who are not married share a house, they get a reduced rate £100 - not the full £200.

LEWIS But if you've only just passed 60 you're not going to get it are you?

ACOURT No you needed to be 60 or over by the 24th September. If your birthday is after that you won't get it this year.

LEWIS Thanks Chris. That's all we have time for today. If you'd like more information about any of the items on today's programme you can call the action line - that's 0800 044 044 Calls are free on: 0800 044 044 You can look at our website of course which you can reach through the new Radio 4 website - www.bbc.co./radio4 or directly at www.bbc.co.uk/moneybox. That'll be updated later this afternoon and remember our email address: [e-mail]. You can keep up with personal finance throughout the week from our colleagues on Working Lunch - that's on BBC-2 at 12.30. Vincent Duggleby is back on Monday with our phone in MONEY BOX LIVE on the financial aspects of divorce - who can get what?- how to do it amicably and? - and the new laws on pension splitting. And I'm back as usual with MONEY BOX next Saturday on noon. Today though the reporter was Chris Acourt, the producer was Jennifer Clark and I'm Paul Lewis.