Baroness Altmann, a cross-bench member of the house of Lords lays it on the line. If we want UK income tax relief we need to invest our pension money in Britain. She ominously warns this especially is a threat to higher rate relief.
Some commentators are strongly opposed to the idea of the government driving more pension support for UK growth assets.
Britain urgently needs more long-term investment to boost the economy, and all other leading nations’ pension funds overweight their domestic markets. Yet the Times Money columnist Robin Powell wrote last week that the state would be wrong to ask pension funds to increase domestic asset exposure. I must respectfully but profoundly disagree.
Those arguing against higher UK pension allocations fail to factor in the fact that taxpayers fund tax relief of more than £70 billion a year to supplement individual or employer pension contributions. This massive public expenditure exceeds annual spending on defence (about £60 billion), transport (about £45 billion) or the police (about £30 billion).
There is also tax arbitrage, where pension contributions get relief at your highest marginal rate but only pension income above the higher-rate thresholds in retirement faces higher-rate tax, with most pensioners being basic-rate taxpayers.
It seems to me that there is clear justification to expect those getting such expensive exchequer subsidies to invest more of their contributions at home, to benefit UK growth and build a better Britain for their future and for the rest of society.
My recommendation is that the government should require at least, say, 25 per cent of new contributions to be invested in domestic risk assets.
This is not mandation. It is using tax incentives more effectively to boost British growth and business prospects. If pension managers want to invest more than, say, 75 per cent of their fund abroad they can, they just won’t have the government money added. This obviously changes the expected return calculations, while leaving managers free to choose what to buy in their members’ best interests.
This policy proposal would help to reverse the vicious cycle created by the selling of domestic assets by pension funds, which drove British market underperformance, reduced valuations and left companies struggling to find equity finance at a reasonable cost. Many have had to take on debt or seek funding and listings overseas — or have been left vulnerable to takeovers on the cheap by foreign competitors.
Using tax relief to incentivise higher UK investments, and much needed infrastructure and housing, would revive the reliable long-term investment base we have lost and which other countries’ pension investors provide for their economies.
Restoring regular pension fund flows can become a virtuous circle, unwinding the devaluation created by past pension selling. At no additional Treasury cost this would boost British equity markets, start-ups, scale-up businesses, infrastructure and housing, which are crucial to future economic success.
Alternatively, if such huge amounts of public money continue to flow away from the UK, I suspect that the calls to remove or reduce tax reliefs (especially higher-rate reliefs) will grow.
This looks unworkable to me. Ros wants to make the tax relief on the flow of new money into the system, conditional on the investment allocation of the stock of money already in the system. How to stop individuals or institutions from gaming the system? How to justify imposing a penalty on new savers (the loss of contribution tax relief), when you’re trying to modify the behaviour of existing savers (the money already in the system). This just looks like a baby boomer pulling the ladder up after her. For someone who used to be a Conservative, it’s also surprisingly authoritarian. If you want to encourage a behaviour, use incentives; if you want to discourage a behaviour, use penalties.
I don’t think that Ros is thinking of anything but the default of the pensions (which is tough where Master Trusts like Lewis investment get a lot of people to take decisions). I reckon smart people who find they are losing their tax relief will have questions to ask of their trustees and the provider of the pension, (Proprietor with CDC). But I take your point. She is not of course alone, Andy Haldane came out with the same argument in a recent speech.
I’m a huge fan of the Baronnes, but Tom is correct.
It might give a short term political sound bite, but compulsory investment only leads to good money chasing bad, and will end in tears.
It’s economically illiterate to pretend otherwise.
By definition, it’s a sad reality that politicians either do not understand or care about enterprise or commerce, and increasingly the political class have become myopically obsessed only with the spend side – for that is where the short term electoral gains come from. It’s dead easy using someone else’s money for votes.
The 20 year TPR/DWP de-risking experiment into Gilt mandation has been an economic disaster and one that will not be fixed by doubling up mandation into UK equities, unless perhaps if that is matched by a reversal out of the compulsory holding of gilts. Everyone knows that can’t be ‘allowed’ to happen.
The only economic solution (accepting the political reality that uk pension schemes are now bound into holding a large element in gilts), is for the good money (ie the none gilts part) to chase the best ideas based on their merits. Gov’ts (anywhere,inc UK) can load the deck in their favour by providing incentives and reliefs and infrastructure support. Mandation has never worked in any of the socialist regimes, and it won’t work in the UK.
The very purpose of occupational pension schemes was to remove the weight off the State! We, the Industry have meekly allowed the State to effectively take ownership of our privately funded and invested pensions,so doubling up the reliance on the State (ie via the gilt reliance’s)!!! It’s totally batsh#t crazy and tinpot economics and shouldn’t be allowed to persist, apart from the fact that there are huge consultancy fees from being complicit with the transfer of said private pensions to the State!
In the UK, 2.5% of individuals earn £120,000 or more per year pay an estimated £130 billion in total income tax per annum, which accounts for approximately 43% to 45% of all UK income tax receipts.
These are the same people who are expected to invest in infrastructure but as these are predominantly illiquid IHT liabilities will discourage allocation to this sector.
You sound like you want a fiscal oligarchy to drive private pensions John. Do you?
Dear Comrade I was hoping to encourage balanced and objective content rather than winging Pom and to change the narrative from the daily small pot big pot repetition
Oh well, another reason to prefer ISAs. Longer term, a reason to find out how to move capital abroad. Any advice on the latter for the non-rich?
If you are contemplating moving abroad the the ISA benefits may be lost so liquidate while UK tax resident. Life and health span are higher up you requirements list as is food energy and water independence. A climate at 22c all year round would be great with options to move to higher ground is the sea level rise.
Check the effect on your discretionary income and social healthcare would be good to have.
IHT is not always charged
Check VISA availability and don’t assume that current rules will still be around when you wish to move.
For me I chose Madeira in Portugal and The north of New Zealand as a a spare
Here are some income levels to help you to put the equations together
https://www.visualcapitalist.com/mapped-monthly-salaries-in-69-major-cities-around-the-world/?mc_cid=b71cf725f6&mc_eid=a03cc140e4
Many thanks. We are fans of Madeira and NZ so you may be pushing on an open door.
I’m not worried about sea level rise: I note that Obama bought seaside estates in New England and Hawaii so clearly he’s not bothered either.
If higher rate tax relief is to be conditional of domestic investment, presumably, Altmann is in favour of public sector DB schemes being carved up, so where 40% relief is applied, at least 15% of the higher rate payments are invested in a DC like fund, with the public sector employee shouldering the investment risk?
Or is she only in favour of private sector DC savers shouldering the burden and risk on domestic investment, and everyone else getting a free ride?
Ooh, wickedly penetrative question. It’s like asking Labour MPs who are in favour of apprenticeships which university they are going to send their own children to.
Just to keep the brain ticking over I set up a concierge service priced at 1% of the property price buyers agent.
http://Www.emegre.eu it is not profitable yet but useful way to build new social networks. Web site is being redesigned so just waiting for the early September (PT) and October (UK) budget. A sober 22C sunny day today.
One interesting feature is the favourable estate tax after 10 full years of residence
NZ I did that visa in 2000 not sure if it would make the list today apart from Mid January to the end of February