Why we have no choice but to trust on tax

Trust government

People argue that a taxation system that offers limited incentives upfront and relies on “jam tomorrow” is flawed. People won’t trust it

But such a system is in place, it is labelled the Individual Savings Account (ISA) and people trust it.

Research suggests that people like to know where they stand and a promise of no tax in the future is one that they understand. By comparison, a promise of unknown taxes in the future (what pensions currently offer) is not seen as good.

A promise of tax-free cash at the end of a savings period has underpinned all successful Government initiatives over the past 50 years, from Life Assurance Premium Relief to ISAs.

This is behavioural psychology at work and has nothing to do with the fiscal reality. People are prepared to pay a premium for the certainty of tax exemption. I know that many of my readers regards tax relief as tax deferral and that the numbers I have used in recent blogs have ignored the impact of time (Bryn), but in today’s low growth, low income world, people are less inclined to buy a hypotheticals real return on money and more likely to stick with a “growth is cancelled by inflation” formulation.

To be frank, if we believe Thomas Phillipon’s long-term numbers, suggesting there is a 2% pa rake from the financial services industry, who can blame them? I see no great advantage in an over-optimistic view of returns on our money- projections have always got us into trouble and have consistently have created expectations that have not been met.

If you told most people that the deal on pensions was the deal on ISAs plus a little kicker either at the front end or at the back end of the savings period, that would be enough. People are happy enough to be putting away for the future, whether through the payment of national insurance or from the deduction from auto-enrolment. The majority of those who are opting out are not doing so because they aren’t bothered.

So I really don’t b buy the need to load tax-relief onto contributions and I do buy the idea of a clear tax view at the back end of pensions.

I want to see the Government incentive more clearly labelled, either in terms of ‘Bog-off’ or in nominal terms (£4 saved- £1 saving bonus). I want Government incentivising people not to spend it all at once by giving further hand-outs at retirement TEEN – (taxed, exempt, enhanced) and I want retirement savings to become part of our national DNA (not a perk for the well to do and wealthy).

We are the Government, we elect them and we vote them out. We get the Government we deserve. We deserve a good Government and stable policy. We have had poor pension policies over the years that has led to the current instability (we can’t go on like this).

This is why I am looking forward and not looking back and why I back radical reform of the pension system. In the end, it is the country as a whole, not the narrow vested interests of the pensions industry – that matters.


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Why we have no choice but to trust on tax

  1. xyzzy says:

    You miss a fundamental point.

    ISA savers don’t really ‘trust’ the government not to change the rules. What they do have, though, is instant access to the money NOW, should the government show signs of wanting to renege on the existing ISA arrangement. This ability of an investor to cash in at will is a fundamental brake on government attempts to tinker in ways that have retroactive effects.

    Contrast with pensions, where money put away under either EET or (if assorted factions get their way) TEE, will be completely inaccessible for decades. Pension money is effectively held hostage in a way that ISA money is not. This is a large increase in risk, and so pension savers demand a commensurately higher return. You might think the N in TEEN would provide that here, but will it? I don’t think so.

    EET provides a relatively visible up-front incentive. TEEN turns it instead into something arbitrary, invisible, and uncertain. Voters would be foolish to believe that the N would ever materialize. As for ‘we are the government’, that’s just nuts. The current ruling party garnered less than 37% of the vote. Very nearly two out of every three people voted against them.

    For the record, a recent survey suggest that four out of five current pension savers will switch from pensions to either ISAs or VCTs and similar if higher rate tax deferral were cut. So it hardly seems at the moment as though ‘radical’ redesign of pensions is going to result in them becoming even a microscopic part of “our national DNA”.

  2. henry tapper says:

    I’m surprised that four out of five savers have heard of VCTs- sound like the recent survey was a specialilst affair! I take your point- but the amazing thing about ISAs is that though people can take their money, nobody does- the exact opposite of pensions!

    People trust ISAs more than pensions , probably because they are trusted with their money!

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