So we get to the heart of the matter. Is a pension a “wage in retirement” or is it a “tax-incentivised tax-wrapper”? This little exchange on twitter sums up the differing views.
For those who practice holistic financial planning, Al and Dave among them, a pension is just another way of expressing someone’s total wealth, whether it is a source of income or capital, the utility of your SIPP is based on its tax-incentivised status.
For me this is quite outrageous and I rage against this perversion of the word “pension” and the abuse of my tax payments to fund tax-arbitrage for the wealthy.
Of course I’m partly wrong and Al and Dave are partly right, but we shouldn’t let the exceptions drive the argument. 94% of the UK population do not take holistic financial advice; the 6% that do – the wealthy 6% – do not drive the argument. They are the lucky sods who hold all the cards, they should be keeping quiet – their tax-breaks are paid for by the unlucky sods who need a replacement income in later life.
Why the tax-wrapper is so wrong.
Why I am up in arms against the definition of a pension as a tax-wrapper can be found in my two blogs over the weekend. The one on Saturday celebrates the enjoyment of ordinary people on a day out on the Flying Scotsman. There must have been over one thousand people on the train to York and I doubt more than 10% were under 60. It was great to see older people spending their money – that’s what you can do – if you have the financial security of a wage for life. The cost of the day was around £100 if you went 2nd class and around £150 if you went first. That’s not Orient Express pricing, it’s within the means of the elderly affluent and that included people from all social classes – because of adequate incomes in retirement.
My second blog, was about a very old lady who spent her time trying to stay health by working out and taking care of her health. Her daughter poked fun at her for the time she spent in hospitals, she replied “I’m busy staying alive”! There is a natural and very proper instinct among older people to live their lives properly way beyond their life expectancy. They are the people who have quite enough on their plate to be managing the “hardest, nastiest problem in finance” on their own.
My point in both these blogs was to point to the social and economic advantages of people having pensions – a wage in retirement – and spending them!
Tax incentivised savings accounts are not pensions
Candidly the problem is that too much is being saved in pension schemes.
And the solution is nationalisation.
And your failure to accept this is exceedingly neoliberal. https://t.co/ZSVbLbitgc
— Professor Murphy Richards (@MurphyCandidTax) July 1, 2018
The disgruntlement of Professor Murphy Richards, is not about pensions at all. It is about the tax-advantages given to the 6% of the population who have advisers and intend to use their pension pots not to buy pensions but to pass wealth – tax efficiently to the next generation and other such nonsense.
It was not for this that the tax-breaks on pensions were created. The tax-breaks that IFAs and their wealthy clients so cherish, are heavily slanted to the wealthiest in society, meanwhile, hundreds of thousands of those on low incomes are being excluded from pension tax relief altogether, either because they are excluded from auto-enrolment – or – worse – they are being enrolled on a tax promise that is not delivered to them.
What the tax-incentivised savings people are keen about – is tax saving for their clients , not tax-saving as a principle. If they were standing up for the current tax system for its social advantages, they would be shouting about the net-pay fiasco for low earners. That they don’t – is indicative of their commercial bias. The tax incentivised lot are about keeping wealth in the hands of the 6% and making the 94% pay for it.
Professor Murphy is right to stop the gravy-train that sees the rich use pension tax legislation to carve out a tax-free source of extra wealth. From the sounds of him, Professor Murphy would not object to thousands of us enjoying some affluence in later life and going on the odd Beano on the Flying Scotsman.
A pension or a tax-wrapper?
If you live and work with rich people, if your source of wealth is rich people’s wealth – then it is not surprising you lose touch with what pensions actually are – a wage in retirement. I am quite sure that Al and Dave haven’t done that as they are normal down-to-earth folk who do not consider helicopters the only way of getting about etc…
The uber-rich have moved beyond pensions, which now only protect a couple of million pounds of their wealth. The uber-rich are into hiding money in offshore trusts etc. This blog is not about them. It is about winning back the hearts and minds of ordinary people, who have become affluent with this country, to the idea of a wage in retirement – a wage for life.
Because so long as people are being seduced by the telephone numbers of a drawdown account, they lose touch with essentials. The state pension is worth a couple of Lamborghinis but it’s valueless to the wealth managers. The DB scheme is simply swapped out for a pile of cash in a SIPP, the consequences are barely thought of.
SIPPs are not providing a wage for life, or very rarely; they are being used to store wealth not to spend it – as is noted by Paul Johnson of IFS over here and Jeremy Cooper in Australia (see other recent blogs).
Meanwhile it is the wage in retirement schemes that are allowing ordinary people to enjoy their later years and fight off the encroachment of death. Britain needs more wage in retirement and less phoney freedoms – end of!
You are right to be outraged about ‘pension’ being used to mean the accumulation product instead of the income bit, especially as if you ask an ordinary person what a pension is they will tell you it’s money you get in old age. But if you google that question you get ‘tax-efficient savings wrapper’ and son on – because the google results are of course spiked by pension companies. It might be possible to reclaim ‘pension’ to mean ‘income in retirement’ (to match the idea of the State Pension). Or it may be that we need to drop the word pension and just talk about ‘retirement income’, which after all rather neatly does the job of saying what it is on the tin.
Henry,
I keep this http://www.pensionizeyournestegg.com/ by my desk; it’s very useful!
Best,
There are lots of “tax efficient savings wrappers” out there so this is not exclusive to a pension, and I would also contend that a pension is no longer the exclusive vehicle to provide a “wage in retirement”. Planning is about building different “pots” to provide the resources to live on when a wage is no longer there.
What is essential however is that there must be an incentive to encourage society to save (wealthy and less so) and a tax break appears to be the preferred choice to provide this. Higher rate taxpayers will clearly be attracted to higher rate relief particularly if it is immediate and the person who is being recommended this course is being advised to do so by a professional adviser (accountant etc).
How can a pension still be a “tax efficient savings wrapper” when the MPAA applies and the LTA is a stealth tax at 55% and trapping more an more people who were under the impression that a pension truly was a “wage in retirement”. They are not “rich” just regard themselves as hardworking and looking forward to their retirements.
I am always reminded of the quote from Lord Clyde when tax saving is criticised:
Lord Clyde, President of the Court of Session, ruled: “No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores.
“The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.”
The problem is one of managing change and how we move from the legacy systems in place to one where the intelligence of AI exceeds the intelligence of the individual. In the past this was handled paternalistically with a wage for life. Clearly in recent years the taxing authorities broke ranks with the NNT model as they found pensions a soft target now we have a fudged contribution and accumulation phase and two levels of tax on withdrawals. This is not what we signed up for . The debt levels of the State and individuals plus unfunded pension provisions will only make this situation worse. Infighting between those who are trying to restore faith in saving is actually damaging the proposition and driving the millennial generation away from accumulating, after all they have been taught to borrow to consume
I’ve mentioned this to ‘pension’ people before, but pension as a wrapper isn’t a guaranteed ‘good thing’
Seeing it as a wrapper or investment vehicle for the purpose of part of a diversified future income provision is sensible.
Seeing it as the start middle and end of future income provision alone is a bit foolish in my view.
Pension freedoms are just that, freedoms.
If you personally don’t like a lack of fences then erect them to suit your needs.
Forcing others to be arbitrarily fenced in against their best interests or desires because of your own insecurity is a dangerous path to go down.
Your passion is admirable, Henry, but it is (as far as I can tell) based on what you believe works best, as between paternalism and personal responsibility. However, if one leans towards the former out of concern about most people’s capacity to take responsibility in areas of decision making that are really quite demanding, then all that happens is that that poor capacity gets reinforced. So it only works best because it is self-fulfilling.
The gamble with pension freedoms was that solutions not obviously available at the time would nonetheless be developed for supporting either managed or self-directed drawdown, where the rate of spending and investment strategy are viewed as a joint problem (and indeed one that does not exclude an annuity at some point). Conventional asset management and rules of thumb about draw rates do not treat it it as a joint problem requiring a joined up solution. In fact, that’s the kind of paucity of innovation you might expect to see in a market where paternalistic institutional structures have dominated. But that it is not to say that innovation is not occurring, my own company being a case in point.
We are working hard to lower the entry point (in terms of both assets and comprehension) for our well-developed drawdown solution (now 13 years old) from high-end to mass market. It is radical in the sense that it relies on revealed preferences rather than conventional risk tolerance discovery processes. It is those conventional processes that are indirect and open to the kind of communication and comprehension challenges that can indeed make paternalism look a better bet. Our experience (at small scale, to date) suggests it is possible to encourage personal choices by supporting both easier and better decision making by ordinary people with no interest in finance for its own sake. They just have to be able to relate to spending.
Well that’s great Stuart, we discussed this issue at yesterday’s pension playpen lunch. Until I see concrete evidence that we have the management tools to do the job ourselves, I will continue to call for what I accidentally referred to yesterday – the CDC changer!
As a matter of interest, do you think it’s theoretically possible – in other words that there is a principle-based approach to the management of the same problem in CDC that could be applied similarly to private capital and supported by the same kind of mathematical logic? I agree that might still leave a credibility gap until you can see it in action but at least it’s a problem likely to have a solution.
Bear in mind the target here, a level annuity, is very easy to beat in terms of utility delivered. The comparison with CDC is helpful in breaking down the problem but it isn’t just a choice between them. Even third-way annuities are demonstrably superior to level annuities at retirement, if not to drawdown without guarantees.
Henry.
Anyone who thinks “Pensions Freedoms” are where it’s at with pensions either knows nothing about pensions or knows they can make a killing through pensions freedoms! Either way they should not be allowed to comment about, or work in, pensions!
Regards,
Robin Rowles
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