There’s a famous story, now fading from popular memory about Strand, a brand of cigarettes in the sixties. Strand came out with a strap-line
“you’re never alone with a Strand”
It killed the brand stone-dead. People associated smoking a Strand with being alone, being a loser – with failure.
The words and phrases we use, we get used to. Phrases like “tax-relief” and “retirement income shortfall” and “poverty in old age”. The encouragement we give people to save is couched in similar language; we should “save”, we should “avoid” and we should “plan”.
The language we adopt to encourage people to spend on their later years is couched in negativity. The people we should be encouraging are being asked to consider their later years as a time of financial hardship. The business of building up a big-fat retirement pot is being promoted as an act of denial.
And along comes Johnny- chancellor with a new idea. We’ll encourage people to think of the money we spend on our old age as 100% tax free to us. Like our ISAs, 100% of what we put by , will be ours to spend as we like, without having to pay money to a future Johnny Chancellor.
And guess what? According to a poll last week by PWC, people prefer the idea of paying tax today rather than tax in retirement, especially if they are being encouraged to do this by “BOGOFF” fiscal incentives.
Here’s an extract from PWC’s press release
New PwC research reveals that people want their pensions to be treated more like Individual Savings Accounts (ISAs).
PwC surveyed nearly 1,200 (1,197) working adults following George Osborne’s consultation, launched in the Summer Budget, to radically review how pensions are taxed. When asked to choose the most appealing tax scenario for their pension, only just over a quarter (27%) picked the current system – where people and their employers receive tax relief on their pension contributions, and the pension is partially tax free at retirement with the remainder being taxed.
Moving pensions towards a similar tax treatment as ISAs, where you contribute out of post-tax income and any returns are tax free, is by far the most popular preference. Four in 10 respondents chose this answer as they say they would rather be taxed while they are working, than in their retirement. People also say it would help them better plan for their retirement as they won’t have to factor in tax deductions. Only one in seven people say the current tax exemptions on pension contributions incentivise them to save.
Six in 10 people say that constant changes by the Government to how pensions are taxed is the biggest barrier putting them off saving more into their pension. This is followed by people not understanding how much they need to save for an adequate retirement and the pensions system being too complicated.
The research reveals that the majority of people also don’t understand how pensions are taxed, with two thirds of people surveyed not able to correctly identify the current system.
…..Raj Mody, head of pensions consulting at PwC, said:
“The reality is that when it comes to tying up money for the long-term, people need an incentive. Otherwise why would you bother saving for your retirement when faced with more immediate pressures on your finances.
“We believe any new system should include a simple to understand incentive from the Government for retirement savings that would allow the lifetime and annual allowance tax regime to be abolished.”
So let’s be clear; even though most people will pay less tax under EET than TEE, people want to pay tax upfront so they save on tax later.
There is an important behavioural motivation to this and it comes back to problem with “you’re never alone with a strand”. People do not want to be told that they will be paying less tax in retirement than they are now because they don’t want to think of retirement that way.
They aspire to be rich in retirement, they aspire to getting a big fat tax-bill
and most of all they aspire to ripping it up and telling the tax-man where to go. Like Tsipras!
The language of freedom
The Chancellor is inventing a new language with which we can talk and think about pensions, it is a language that replaces “tax-relief” with “tax-incentive”, that swaps “save” with “spend” , “must” with “could” and which promotes “freedom” not “avoiding poverty”.
It is a language of aspiration, and however phoney you may think that aspiration, nearly twice as many people would rather aspire to be richer than in retirement than face the reality of being poorer.
Which is why the Chancellor will win, and the bean-counters will lose.
If people are encouraged to get stuck in and become self-sufficient – if the trick works … then I’m for “phoney aspiration”. Long-term investment turns “phoney” into “reality”.
Raj no bean-counter…
I do not include my good friend Raj Mody as a bean-counter, not least because he is an actuary and has the imagination to empathise with popular sentiment. PWC employ more actuaries than any organisation in Britain and actuaries have the happy capacity to see into the future.
Where I stand on this
I have written lots about a future based on aspiration, about what I call “Popcorn Pensions“. I share the view of the Chancellor and Raj and most of the population that I would rather spend on my later years with the prospect of a big fat pot of money as my reward than save to buy an annuity.
I don’t want to be “alone with a tax-bill” and I want to buy into a tax regime, which like ISAs, I can be sure of.
Will I benefit from a change to TEE? Almost certainly not – in financial terms. But does that worry me – no – not really! Actually I’d rather be certain about what’s going on , pocket my incentives and look forward to writing “zero” on my tax assessment than continue to live in a world of LTA, AA, PIP, Salary Exchange and marginal rate tax -relief.
If you want to read the Pension PlayPen submission to the Treasury on the incentives needed to get people to spend on old age, press here.
TEE vs EET is too simplistic, Henry. The alphabet soup of pensions is more complex.
In an EET world there is (for now, anyway) the 25% tax free lump sum, which may not be well understood but it is certainly popular with the vast majority of retiring members.
The ABC of actuaries and bean counters should not be let off so easily, either, as their meddling and “insurance” mindset has contributed to the demise of so many well intended and (with some exceptions) well run DB schemes, where the Ts (the trustees) and the Es (the sponsoring employers) did a lot to invest prudently and maximise available reliefs (salary sacrifice, which continues at least for now, profit-related pay in the 1980s and 1990s, age related NI rebates until 2012) in members’ best interests.
A not only stands for actuaries, accountants and auditors, who have a lot to answer for, but won’t; A also stands for annuities.
As I said elsewhere in response to this same report, I bet I could come up with a survey that would produce a completely opposite result.
Well go on then Gerry!