Money Box - 20 April 2002

THIS TRANSCRIPT IS ISSUED ON THE UNDERSTANDING THAT IT IS TAKEN FROM A LIVE PROGRAMME AS IT WAS BROADCAST. THE NATURE OF LIVE BROADCASTING MEANS THAT NEITHER THE BBC NOR THE PARTICIPANTS IN THE PROGRAMME CAN GUARANTEE THE ACCURACY OF THE INFORMATION PRINTED HERE.

MONEY BOX

Presenter: Paul Lewis

TRANSMISSION 20TH April 2002 1200-1230 BBC RADIO 4

The Budget

Equitable Life

Pensions

Cash ISAs

LEWIS: Hello in today's programme the most radical budget for years but will you be better or worse off? Are Tax Credits benefits by another name? And the secret help for pensioners buried in the detail.

Equitable Life goes from bad to worse as policy holders lose yet more money.

Six firms are investigated after redundant workers are offered their pension funds in cash

and new offers on cash ISAs could give you a better return.

LEWIS: But first the big gamble in what has been called the most important budget of labour's term in office

BROWN: Mr Deputy Speaker we have made our choice, this is a budget to make our NHS the best insurance policy in the world. The National Health Service is a British ideal, free at the point of need for every one in every part of Britain, fairness and enterprise together, and I commend this budget to the House.

LEWIS: Gordon Brown telling us on Wednesday he was going to raise an extra 8 billion pounds in direct taxes, without of course actually saying so. In just under an hour the Chancellor unveiled a new way of taking money off us through a 1% tax on all earnings over £89 a week. And new ways of giving it back through a complicated system of tax credits. This weekend Tony Blair and Gordon Brown continue to try to persuade us that the higher taxes really will improve the NHS but when these radical changes begin in 2003/04 how hard will the tax rises bite? Money Box has been pouring over the hundreds of pages of background documents to find the wrinkles and traps and who will gain and who will lose from the 2002 budget.

First to Gloucester and to Mike Warburton of accountants Grant Thornton. Mike this has been called a draft budget for next year - it's a real mixture isn't it of this year next year and even a bit of sometime never?

WARBURTON: Well yes the Chancellor is planning things a long time ahead. What he is doing is setting down the framework for collecting tax for the rest of this Parliament to fund the health service which of course is a long term prospect. And what he's doing, he's doing it essentially by this special tax on employment, he's taxing an extra 1% on employers, he's also taxing an extra 1% on employees and I think that's the best way to think of it. Think of it as an extra tax as you described Paul running from £4,615 at 1% right the way up and realistically if it's that, why is it called National Insurance? It seems to me it's just an income tax on earnings, it also of course applies to the self-employed . The people who aren't taxed on this, on their income of course are the pensioners and indeed savings income, but in all other respects it looks to me like a new income tax. Only of course he couldn't call it an income tax because there was a manifesto pledge not to do it.

LEWIS: Yes I mean it's a tax on earnings not just on income and it is an important point because it doesn't affect savings and of course it doesn't affect people over pension age even if they are working because they don't pay National Insurance.

WARBURTON: I think in many ways this is a regime in this budget which is taxing those people in the middle - the people who are earning but the people who are living on savings income and pensioners have really done quite well out of this budget - yes.

LEWIS: Now you mentioned the self-employed people and of course they get the extra 1% whacked onto them as well because they pay slightly less National Insurance it's actually a bigger proportional rise in what they pay and a lot of self-employed and small business people are wondering if they can minimise that. I'll just play you this - Money Box listener Robin who is a self employed animator

ROBIN: My income can fluctuate quite a lot. My best year so far I've earned nearly £70,000 and I was just wondering whether it would be better for me now to become a limited company and perhaps make my wife a director of the company as well you know to distribute the tax burden between us.

LEWIS: So Mike, incorporation I think it's called, turning yourself into a company, would it work for Robin?

WARBURTON: It could well do. Actually at the moment even without the changes it could be effective because what you can do is you can put your business into a company and extract your money instead of as remuneration you could extract it as dividends. And there are a number of savings that are going to come in. First of all the tax on companies is dropping from 20% to 19%, the payroll tax that we have got here on employers and employees would not apply on dividends and of course the funny way that dividends are taxed themselves with the tax credit coming out is particularly attractive it can be paid to people within their basic rate band. So it seems to me that Robin could indeed benefit here if he put his business into a company. If the shares were held equally perhaps by himself and his wife maybe he and his wife took out remuneration up to basic rate threshold of £4,615 and I did some figures on this and it seems to me that even if he took all the dividends himself he can save about £4,700 a year and the saving are even bigger if he splits the dividends with his wife. The warning I would make of course is it could affect your remuneration declared of course for any mortgage applications and I have had a bit of concern about the way in which you can pay pension contribution based on this. Although of course under the Stakeholder pension rules you really can select the best in five - can't you.

LEWIS: The best in five years. Yes well thanks very much for that Mike. And of course although some people pay more tax, families with children and low paid workers are going to get a bit back through a new system or should I say a revised system of tax credits. When they start in 2003/4 the cost will nearly be £2.5 billion a year. Now Tax Credits are the sort of mirror image of tax, normally we earn money and the Inland Revenue takes some of it away usually before we've even seen it, tax credits are the opposite; if you have children or low income the Inland Revenue gives you money back, it's sometimes called Negative Income Tax. Now the Chancellor gave us some details of two new tax credits which replace two which have only been in place a year or two. And Carolyn from Stafford is one of many listeners who've been in touch wondering if they will be better off.

CAROLYN: I'm the main earner in the family and I earn £18,625 my husband works part time and earns £6,000. We have two girls aged 4 and 5. When the first one went to school and our childcare bill fell we stopped qualifying for Working Families Tax Credit and became quite a bit worse off. And I'm wondering whether we will qualify for the Families Tax Credit. Things like you know the children being able to go to swimming lessons and trips out we just can't afford on the income we've got at the moment.

LEWIS: Well with me is Martin Barnes, of the Child Poverty Action Group. Martin two new credits - Child Tax Credit and Working Tax Credit, might Carolyn get either of them?

BARNES: Yes it's possible. Firstly the Child Tax Credit will bring together the elements that are currently paid for means tested benefits and Working Families Tax Credits. It will be paid to the main carer but the key thing is that it will be made up of different elements. There will be what they call a family element of about £10.45 and a child element of £27 or so for each child. Now in Carolyn's case I don't think she will be entitled to the child element because that really only goes up to sort of joint incomes of about £13,000. But the family element that will go up as high as joint incomes of £50,000 and it's not entirely taken away until you reach the £58,000 level.

LEWIS: Now that family element is the one that we call the previous Children's Tax Credit, that's the one really that isn't for poorer families - it's for all families with children unless you're rich.

BARNES: That's right. Because clearly you know go back it used to be married couples allowance then it became the Childrens Tax Credit which only came in last April. Next year when it's rolled into the Child's Tax Credit, some losers though but it will go quite high up the income scale.

LEWIS: And of course people like Carolyn have an income just too high to get the sort of lower level means tested benefit unfortunately but she will get that family credit. Now of course one of the problems with all these benefits is a change of circumstances - isn't it. You think you've got it you lose your job and that's been worrying many listeners like Gary from West Yorkshire.

GARY: The rule seems to state that the mother gets the allowance. Well in a situation where the parents are divorced and the children spend equal time with both mother and father - what happens then? Or will it follow the same route as the benefits that get paid to the mother only like child benefit?

LEWIS: Gary's question is a very common one. At the moment it seems that the intention is for Child Tax Credit to follow child benefit so if a separated mother gets child benefit she'll also get the credit but these detailed rules are still being discussed. Martin generally changes in circumstances can be a worry?

BARNES: Well one of the big changes that firstly the tax credit will be awarded for up to 12 months but clearly during that time peoples' circumstances are going to change. Now the main sort of circumstances that you would have to inform the Inland Revenue of is clearly if a couple separate or single parent co-habits or if a child is born then the payment can be re-assessed. But also changes of income. Now what we learnt this week was that to protect people when their income goes down if your income falls lower than the income upon which it's based, immediately be re-assessed. But the interesting thing is that if your income increases you're actually allowed to keep £2,500 for that year and still get the same level of tax credits that you were first awarded.

LEWIS: It is all very complicated Martin, briefly are you worried that although this maybe a good idea in theory it will fall down on the practical details of getting people to claim.

BARNES: In principle I think it's a big move forward. But the issue of take up is very important the current working families tax credits, up to the third of the families eligible are not claiming, the new system is very confusing and people need to take up bank accounts.

LEWIS: Martin thanks very much. Now one group that are usually mentioned a lot on budget day are older people - pensioners. This year not much about them at all. But at least one Money Box listener was very happy when the Chancellor sat down.

MAN: Hopefully the extra money is going to improve the National Health Service and pensioners are people who use the health service a lot. We should get that benefit without any cost to us because we don't pay National Insurance contributions. Although the Chancellor froze personal allowances as a whole he's actually increased the pensioners personal allowances a little bit, he's guaranteed the winter fuel payments as well for the rest of this parliament. And in addition he's given a slight extra increase over the cost of living in the pension to the future. So taking that package together I think it's good news for pensioners.

LEWIS: Well that was Money Box listener Robert who lives in London and Louise Greenwood is with me. Louise, Robert seems happy but there are big changes ahead for older people aren't there?.

GREENWOOD: Yes. This year Paul, as you say, pensioners were not the focus of Mr Brown's attention but we know in October next year a new pension credit will begin. We didn't get anymore detail about it on Wednesday, however, the Chancellor did say 5 million pensioners would gain from it by an average of £400 each. But it's still not clear how that figure was worked out those details will have to wait now until the pre-budget statement in November which will probably very much focused on pensioners.

LEWIS: Well it sounds like more money for pensioners but not every one is happy with these plans - are they?

GREENWOOD: No the Tories and the Lib Dems as well as pensioner organisations like Age Concern and Help the Aged have opposed the change on the basis that's it's a means tested benefit. They point to the current minimum income guarantee which hasn't been claimed by up to three quarters of a million pensioners who qualify, losing them nearly £25 per week on average.

LEWIS: But as Robert said some good news on tax allowances for those millions of pensioners who do pay tax?

GREENWOOD: Yes they get a higher tax free allowance than other people. That's the amount of money they can have before any tax has to be paid. This year that amount rises to £6,100 or £6,370 for those over 75. But the really good news is that next year those tax free allowances will rise well above inflation knocking around a £100 a year off the tax bill of most pensioners. However, women pensioners under 65 won't get this advantage because next year tax allowances for people under 65 will be frozen.

LEWIS: Yes. And those higher amount for the next year are the curious figures but they come from previous commitments made by Labour. And a bit more news on the amount of the retirement pension.

GREENWOOD: Yes - pensions went up by £3 a week this year and next year the Chancellor confirmed there will be a rise of around £2 a week.

LEWIS: Thanks very much Louise and also thanks to Mike Warburton of Grant Thornton and Martin Barnes of Child Poverty Action Group and there's more about the budget on our web site, there's lots of links to other sites and sources and that's at www.bbc.co.uk/moneybox.

Now things don't always go from bad to worse unless it seems you're an Equitable Life customer. On Monday its remaining investors were told of further cuts in the value of their policies. There was a general cut of 4% which will apply even to people taking their pensions or other investments at the end of their contract. The bonus already announced for this year has already been cut by 2% and any one who thinks they might want to get out of Equitable life will face a bigger penalty. Instead of a 10% reduction they will lose 14% of the value of their investments. There was some distraction from the bad news by an announcement from Equitable Life that it was trying to pass some blame for past problems onto its auditors Ernst & Young. It's suing the company for 2.6 billion pounds for allegedly not spotting things going wrong two years ago. But that's little comfort to members who just two months ago voted for a compromise deal that was suppose to give Equitable Life stability for the future. I asked Equitable Life's Chief Executive Charles Thomson how could he possibly justify making these further cuts so soon after members had given him the vote he wanted.

THOMSON: If you look at the fund over last year 2001 then even with a relatively smaller proportion of equities than with some other with profits fund we have a return on the fund last year which is minus 6% and that has to flow through to the benefits. We have to reduce final bonus which is what we've done. Which every other with-profits fund has done as well.

LEWIS: But people must feel a bit peeved that your fund is as you say less invested on the stock market than many others, I think its about a third or thereabout of your money is on the stock market, and yet the cuts you are making seem bigger than your rivals.

THOMSON: Well we have less exposure to the stock market now than our rivals that's correct but we still have exposure as you say. The 2001 accounts will be published in about a couple of weeks time and they show all of the circumstances of the fund at the year end. And we have made prudent provisions for all of the issues of the company and on the basis of that we need to make these changes, reducing final bonus to protect those who continue.

LEWIS: You say you've made prudent provision is this the last time your members are going to be unpleasantly surprised? If it's that prudent and that cautious and based on the figures this really should be the last cut - shouldn't it ?

THOMSON: We can never know what will happen in the stock market, we can never know what will happen to the value of assets of all kinds. We're doing the best we can to make this fund more like a normal with profits fund. There's one pot of money for our policy holders we must make sure we manage it as best we can in the interest of the vast majority who have now effectively told us that they are sticking with it for the long term.

LEWIS: They don't really have much choice, I mean they are really trapped in an organisation going nowhere aren't they?

THOMSON: I think that's unfair we have set out in our letter to policy holders and in our strategy document, where the society is and what we can do in order to restore normality to the fund. It was an extremely unusual with profit fund. We have done a lot now to make it more normal and we will carry on doing that.

LEWIS: We have heard all this haven't we- you've said this to me before every time you make a cut. You or one of your colleagues have said this but it just seems it goes on and on and on and gets worse and worse and worse. Let me just ask you about the action against Ernst & Young - you really seem to be saying that the Society was badly managed before you arrived and the present managers and now you're going to sue the auditors who should have spotted that. Is that a fair summary of the case?

THOMSON: Well obviously its sub judice, there's very little that I can reasonably say but in essence we're saying the society was damaged, the extent of that damage is the 2.6 billion figure and we would like to establish whether the auditors had a responsibility in that.

LEWIS: But you're using some of the diminishing funds of policy holders to try and establish this. Do you think you have a hope of gaining anything significant?

THOMSON: Well we've said all along that we are aware that the cost of any kind of litigation of this kind is substantial and therefore it is only sensible for us to use policy holders' money to pursue for example Ernst & Young if we believe there is a good prospect of success and of recovering a substantial sum of money. The advice we have at the moment is that these conditions are met and therefore we should spend policy holders money in this pursuit.

LEWIS: And what about the directors because if the auditors missed something it was the directors that were doing it - are you going to be going after them as well ?

THOMSON: By the end of this month we hope to have a clear position to state as to what the position of the directors is.

LEWIS: Charles Thomson Chief Executive of Equitable Life.

Now six companies are being investigated over a multi-million pound scheme to transfer money out of pension funds and pay it to members in cash. Such a scheme would be unlawful and even if the members get paid any of their money the Revenue could demand up to 40% of it back. The Occupational Pensions Regulatory Authority has already appointed independent trustees to take over the pension scheme of one Liverpool firm, the Brand New Carpet Company. Many of the people targeted have been redundant ship yard workers. For more on what's going on lets talk live now to Giles Orton who's head of pensions at Eversheds Solicitors. Giles how widespread are these schemes ?

ORTON: Well we're not entirely sure but there seem to be six of them being operated in the Liverpool area maybe some more in the North of England, they maybe just the tip of the iceberg we really don't know.

LEWIS: And how are they suppose to work - what are people being told that they can do through these schemes?

ORTON: People are being told there's a tax loop hole, that if they sign up to a contract of employment with a new company, for whom they don't have to do any work and certainly won't get any pay, they can then join this company's pension scheme, apply to have their pension rights transferred over from their previous employer and they are then told that when it arrives they can have 75% or thereabouts paid over to them in cash.

LEWIS: Now apart from the fact that this involves somebody signing a form saying they are an employee when obviously they're not - is it actually illegal ?

ORTON: Well it doesn't appear to constitute a breach of the criminal law assuming that is that the members get the 75% that they're promised and we're not entirely sure that they are.

LEWIS: Of course if they didn't then it would be fraud presumably.

ORTON: Exactly. But even if there isn't that fraudulent element to it, it's certainly a breach of the tax laws and what the members will find is that if their 75% does arrive, in the months to follow when the Revenue does catch up with them there will be a bill for 40% of the total amount to be paid as well.

LEWIS: And that's 40% of everything not just on the 75% they might have got so it's quite a large chunk and presumably the people organising the scheme keep the other 25% and use that as their profit.

ORTON: Well they seem to be paying out commissions to canvassers, commission to the companies that they sign up to front it but they're obviously taking a pretty good cut out of it.

LEWIS: Now the people they are targeting, obviously they have pension entitlement but not much money now, is there any legal way of unlocking the value of the pension fund?

ORTON: Generally not , unless you're over 50, the deal with the tax man is that you get tax relief when money goes into a pension and you have to wait to draw it as pension when you retire.

LEWIS: But if you're over 50 you can what transfer it over into a Stakeholder?

ORTON: You can transfer it into Stakeholders or personal pension and perhaps get 25%.

LEWIS: And is there any way to spot the dangers - what should people be on the look out for either individuals or companies who may be being targeted?

ORTON: The danger sign is being told you can get at your pension straight away, more than 25% being offered and dummy contracts of employment.

LEWIS: OK thanks very much for that Giles Orton Head of Pensions at Eversheds Solicitors.

Now one surprising thing missing from the budget was anything at all on savings. Its a long time since we've had a budget with no new measures to encourage us to save and it was a bit of a disappointment to a lot of people. The limit of putting £3,000 a year into a tax free cash ISA remains however some new deals with these cash ISAs could boost the returns, if you're prepared to tie your money up. With the look at the best deals around is Money Box's Chris A'Court.

A'COURT: Yes Paul there are significant development for people selecting one of this year's cash ISAs. Firstly it's now much easier to get a cash ISA that pays a fixed rate of interest for up to 5 years, Halifax for example is now offering this. And then just like on some ordinary savings accounts that we reported on last week there are cash ISA guarantees, promising that the interest you're paid is directly linked into the Bank of England's rate. Interest on these accounts will track the central bank's rate up or down and many people think rates will go up again later this year in which case that sort of guarantee could prove useful.

David Hanratty is Investment Planning Director for Nelson Money Managers and I asked him about some of the things to consider. Firstly if you're thinking about going for a fixed interest rate cash ISA he said you should be aware it's a bit of a gamble..

HANRATTY: You are backing interest rates are going to be relatively low for that period of time which they may well be on the other hand they may not. Secondly you have to be prepared to tie this money up for the full amount of the term, you shouldn't regard this as a reserve that you can dip in to should you need to. You should have money elsewhere that serves that purpose.

A'COURT: There are still ways of getting your money out if you want to though

HANRATTY: You can get access to your money but you'll find typically you might pay up to 180 days' interest which will really take the shine off the return and you'll probably find that leaves you with a less attractive return than maybe a more flexible cash ISA if you'd started with that at the outset.

A'COURT: What about guarantees linked to the Bank of England rate ?

HANRATTY: Well I think for people who want more flexibility than a fixed term ISA and therefore they're prepared maybe to give 60 days notice or they're looking for protection in the interest rate, then having it pegged to something means at least you know that the deposit taker can't start fiddling around with the rate for their own commercial purposes. And I think that's grand for people who require more flexibility but are looking for some protection.

A'COURT: But still if you're seeking the best rate it's probably best to shop around regularly.

HANRATTY: But on the accounts where the rate is variable then there is still plenty of evidence to suggest that if you don't watch the rate then you could find out that in six months time or in a year's time you're in quite a poor paying account.

A'COURT: That's David Hanratty of Nelson Money Managers. Some of the providers offering fixed cash ISA rates are Halifax and Portman Building Society and some of those offering guarantees include Yorkshire Building Society, Virgin Money and Nat West. Do check the terms and conditions carefully though. And to help Money Box has carried out its own research on some of the cash ISA deals worth looking at this Spring, along with the conditions that they have attached. It's with the audience line and on our web site.

LEWIS: Well thanks for that Chris and the web site address as ever is www.bbc.co.uk/moneybox and for the ISA survey go to the research section. There is also a great deal on the web site about tax, a lot of links including things to do with VAT, which we haven't mentioned today but I know is of great interest to Money Box listeners. If you want more information on tax then I'm back on Monday with our phone in Money Box live. We'll be looking at Tax including VAT and tax credits but that is all we have time for today. If you don't have access to the internet you can of course call the information line 0800 044 044 calls are free 0800 044 044. I'm back with Money Box at the same time next week, today the reporter was Louise Greenwood, the producer was Chris A'Court and I'm Paul Lewis.