I want us to be a tad more intrepid with our retirement money

 

UK pensions tax relief hits ‘eye-watering’ £51.3bn in 2022/23

The cost of UK pensions tax relief has continued to climb, according to data from HMRC, with income tax relief on pension contributions in 2022/23 reaching £25.4bn, marking a £5.5bn increase over the past five years.

The figures showed that tax relief on national insurance contributions to registered pension schemes had also grown, reaching £25.9bn in 2022/23, an £8.6bn increase over the past five years.

HMRC suggested that the main drivers for the increasing cost are the success of auto-enrolment, as well as wage growth pushing up pension contributions.

Thanks to European pensions for this pithy summary on how pensions are costing us £51bn a year in lost taxes. Unfortunately the figure is an under-estimate. Speaking at a pensions event at the Centre for Policy Studies, Baroness Ros Altmann revealed that the cost of pensions, when tax foregone on investments is included – is c £70bn a year. That’s a lot of hospitals not built.

So what have pensions ever done for us?

Well , apart from providing the wealthy with what Helen Morrissey of Hargreaves Lansdown calls the “real hidden hero of pensions”, not a lot.

Investment in UK listed securities is down to around 4% of the £2.5trillion in funded UK pensions. Investment in the investment companies (or trusts) that have historically given ordinary people access to unlisted companies, is down to a trickly. The productive finance agenda (AKA – Mansion House) has yet to tick up flows to UK private markets and the fear is that the £20bn a year that pays to give pensions tax emptions on their investment , is simply a hand out to the bond markets.

As reported in a recent blog, Altmann and others – including the Treasury’s Bim Afolami used the 50 minute meeting to encourage investors to get their feet our of “the wet cement of institutional rigidity” and get investing, through investment trusts in productive capital. If we had some more productive capital in our rail network, I might not have been writing as I did about the Elizabeth Line this morning!   

It’s worth remembering the consequences of under-investment in the UK are not just felt in the market capitalisation of our listed and unlisted enterprises but in the productivity of the people who go about their daily business in this country. I spent most of yesterday doing unproductive things because of failures in service directly attributable to under-investment. Remember that £70bn , the next time you find yourself waiting for something that should never have been delayed!

Pensions are not doing enough for everyday people, we need to find ways for them to share in a better economy , created though the proper investment of their pension monies.

Clever people invest in investment trusts

I had a conversation with two clever people, senior people from one of our most successful investment platforms – at the Clara Party I went to this week.

One asked the other “do you invest in investment trusts in your SIPP?”

the answer was

“yes do you?”

Both of my clever friends were in agreement that investing in closed end investment companies that invest into private markets such as private equity, infrastructure and other “alternative” investments was right for them.

I’m keen to understand why so I booked a coffee with Nick Britton of the Association of Investment Companies

He admitted to me that Investment Companies are one of Britain’s few remaining investment secrets, a place where bargains can be found for the intrepid investor.

Of course I am neither intrepid not an investor, I leave that to others (feeble that I am).

However I am pleased to hear that it’s not just my clever friends and their SIPPs who are using listed investment companies, it’s smart institutions who prefer using investment trusts to the recently launched LTAFs as a way to get my money into productive capital that invests into long term assets.

I have to admit, investing in companies whose value is determined by the market rather than the fund manager has attractions , as has the capacity to sell out – albeit usually at a discount, rather than being gated. But I admit that my knowledge of these investment companies is to put it mildly “incomplete”!

There is no shortage or reading material about these trusts. I am currently involving myself in a self-help course on what these investment trusts are about using a library of online material curated and created by the AIC.

Not everyone is convinced , other friends like Chris Sier won’t touch alternative investments with a barge-pole citing examples of high management fees, uncertain valuations and shonky governance as characteristic of investment trusts.

Certainly, working out the good from the bad looks a daunting task. The list of companies to invest into is daunting.

But so are the list of listed companies. We pay analysts to do the work of sorting sheep from goats, I’m just keen that some of the flock give me access to rather more exciting investments than the index-tracker funds where  I find my money currently invested in.

I look forward to writing more about this over the next few days as I’m having more meetings with people much cleverer than myself which excite me greatly.

A bang for the tax-payer’s buck

Investment trusts look a better way to get a bang for the £20bn we don’t collect on pension investments and the £50bn we don’t collect on pension contributions.

Certainly a better way than sending the money around the globe and especially to the huge tech stocks in the USA – that are ballooning in value as unlimited funds pour into their coffers.

I don’t think we should be directing our pension investments solely into global equities and bonds, I think we should be buying listed British companies that invest in unlisted British companies – which are the kind of investment trusts Ros Altmann and others are talking about.

Expect more on this shortly