Pension funds - irrational behaviour

OK, you are a pension fund. You have promised recently retired Mr Saver a lifetime annuity of £2,000 a year and to match this, you have just bought some long-dated UK gilts for £100,000 nominal at 2.5% nominal interest, i.e. you have guaranteed cash income of £2,500 until they mature, which hopefully covers Mr Saver for life. You trouser £500 as your mark-up and pay him the rest. You don't really worry what the residual value of those gilts will be in two or three decades' time - the market value will move back towards nominal value as they approach maturity.

(Or maybe you invested £80,000 nominal at 2.5% interest and pay him the whole £2,000 coming in, and trouser the residual value in two or three decades as your mark-up, same sort of thing.)

Because the fiscally reckless Tories* are in charge, the value of your gilts plummets to 70p in the £1 (giving a notional interest rate of 4% or whatever). So what? The £2,500 interest income (or £2,000 interest income) is fixed, Mr Saver's annuity is covered and there is nothing to worry about. When Mr Saver dies, you sell or keep the gilts, or maybe they mature before he dies and you pay his last few years' annuity out of the proceeds.

So why are pension funds selling off gilts like topsy? Did they invest current savers' money into gilts? That's a terrible idea, as they are not even going to keep pace with inflation, they should be investing in shares.

In the spirit of putting my money where my mouth is, I opened a Stocks and Shares ISA this morning and have chipped in £10,000 for some units in the Santander Sterling Gilt Fund at 211p per unit (or at least I hope I have done, it can take a while for this to go through). Let's see what happens...

* The popular notion that the Tories are fiscally prudent and Labour are fiscally reckless is pure Indian Bicycle Marketing, actually the reverse is true (historically and to the present day). Which is one of the reasons why I have concluded that what this country needs is a Labour national government and Tory local councils, who seem to ignore most of the meddling crap from the national government (they are reluctant to employ Tobacco Control Officers or impose 20 mph speed limits on country lanes) and just run actual necessary public services.

Who benefits from the pensions tax breaks?

Somehow, we drifted off KLNs and started discussing the taxation of/subsidies to pension savings.

Me: "The bulk of the [tax breaks] superficially goes to higher rate taxpayers (who would save up for their old age anyway, with or without 'encouragement') but is actually largely siphoned off by the FS sector."

Lola: "... as I may have said before, you can now buy pension funds with costs capped at about 0.5% p.a. Actually the worse siphoning off of tax subsidies is in cash ISA's."

Agreed to the last bit. For some mad reason, people who can afford to save would rather have 0.6% interest 'tax-free' than 1% gross taxed at 40%. Basic rate taxpayers should really choose 1% gross taxed at 20% rather than 0.6% tax-free, but the numbers are so small, it doesn't really matter in practice.

By analogy, if they scrapped tax breaks for pension savings or ISAs and cut the headline income tax/NIC rates to match, the final outcome wouldn't be much different. The pay-as-you-go state pension is still the best way to go; it's cheap, reliable and effective on whatever measure. And for about a third of actual voters (pensioners are only one-quarter of the adult population, but they have the highest voter turnout), the state pension is pretty much the number one issue - pensioners vote for whichever party makes the most generous promises (it's not their money), and this is one thing in party manifestos that they stick to if they get elected.

To my first point, the total cost/value of tax breaks for pension savings is at least £40 billion a year (trawl HMRC stat's at your leisure). The ONS says that the total value of assets held in pension or annuity funds was £6,100 billion (in March 2018 - it might have gone up or down since then).

Charges of 0.5% seem fair enough, let's round that up to 0.75% for all the extra charges they sneak in - the cheekier ones, the hidden profits they make on paying out stingy annuities, the transfer fees etc. On that basis, the total charges are 0.75% x £6,100 billion = £46 billion.

I rest my case.

Your occasional reminder...

From Professional Pensions:

The government will pay out £21bn in income tax relief for pension contributions this tax year, while national insurance relief payments will rise to £18.7bn, according to statistics from HM Revenue and Customs (HMRC).

The estimated figures - published yesterday (10 October) - reveal the cost of income tax relief for registered pension schemes in 2019/2020 will be higher than the year prior, estimated at £20.4bn, and five years ago at £17.9bn.

This covers relief on contributions, relief on investment returns, and tax paid in retirement - but the figures do not provide estimates on the total receipt in tax when pensions are in receipt.

That last bit isn't quite clear - isn't "tax paid in retirement" the same as "receipt in tax when pensions are in receipt"? But hey, let's run with the headline figure. 'Cost' for these purposes is the equal and opposite of the value of the tax saving to the individuals, it's the same thing.

As ghastly as taxes on earnings (income tax and National Insurance) are, if I were in charge, I would chuck the 'focused' tax savings for pensions contributions (focused on older and wealthier people, including Yours Truly; and ultimately on the insurance companies which siphon it all off again) in the bin and share out the savings more equitably:

1. Increase the NIC thresholds (primary and secondary) to £12,500 (same as the personal allowance for income tax). Tax saving per employee earning more than £12,500 = £950 or so, call it £25 bn all in. That's an important first step towards a Basic Income. The Employment Allowance and Apprenticeship Levy can go in the bin as well.

2. Reinstate the personal allowance for those earning more than £100,000 (which results in a marginal income tax rate of 60%), tax saving maybe £3 bn. Either you believe in universal entitlements or you don't, and I do.

3. Harmonise Employees' primary NIC (currently 12%) and self-employed Class 4 NIC (currently 9%) at 11%, an overall tax saving of £6 billion or so. The self-employed will squeal, but so be it. Lower earning self-employed will be up to £370 better off, and those at the upper end will be paying £300 or so more (paying £3,724 = 11% x £46,350 - £12,500, instead of £3,413 = 9% x £46,350 - £8,424), hardly a life changing amount. Employees at the upper end will be saving £800 or so a year. There are more of the latter than the former.

4. Depending on how much is left over (it gets circular and there is guesswork involved), we can start chipping away at Employer's Secondary NIC, get it down from 13.8% of wages to 12% or something...

Shocking stuff, the audience cries, but a government would just have to do it and damn the torpedoes. (As far as I am concerned, the flat rate state pension of £160 covers it, there's no need for more endless tinkering on top).

By the next election, which party would be brave, stupid or corrupt enough to pledge to reverse this? How's that going to go down on the doorstep: "We pledge to hike tax rates for most people for the benefit of large corporations who make large donations to our party and offer us cosy jobs when we retire"?

Nobody move, or the expat pensioners get hurt!

Spotted by Physiocrat on gov.uk:

Will UK nationals continue to get their State Pension uprated under no deal?

The UK leaving the EU will not affect entitlement to continue receiving the UK State Pension if you live in the EU, and we are committed to uprate across the EU in 2019 to 2020. We would wish to continue uprating pensions beyond that but would take decisions in light of whether, as we would hope and expect, reciprocal arrangements with the EU are in place.

Physiocrat (himself an expat pensioner) adds:

My father emigrated to Australia to be with relatives and was swindled by the UK Government due to the non-uprating of pensions.

It seems as if the UK government is about to play the same dirty trick again. This is just using Brexit as an excuse. If the Spanish government decides not to uprate its citizens pensions living in the UK, why should the UK government punish UK citizens living in Spain by refusing to uprate theirs?

What is the connection? I understand that Norway has a reciprocal arrangement, but then the numbers involved as so small as to be insignificant.

Like so much that has been said about Brexit, it is a strange logic. The British pension is a contributions-based entitlement. What business is it of the government to restrict it if people choose not to live in the UK?

I smell foul play in the offing. A stink needs to be made.

"Women abandon calls for equal treatment with men"

From The Guardian:

The state pension age for women will rise to 65 on Tuesday to match men for the first time since 1940, reaching a milestone that has prompted warnings from campaigners that the pace of equalisation has left some female retirees realising that life isn't a bed of roses for men either.

The equalisation of the state pension age at 65 is the first step towards a rise to 66 for both sexes in two years (October 2020), and a planned further increase to 67 starting from 2026. Another rise to 68 from 2039 was recommended by the official Cridland review this year, which will mean all workers currently in their late 30s and early 40s are treated equally.*

The accelerated timetable for equalising then raising the state pension age will now mean men and women are treated equally, according to the campaign group Wfspe (Women for state pension equality), with about 3.8 million women born in the 1950s expected to wait as long as men before they can live off the taxpayer guilt-free.

From here:

1940 - men age 65, women age 60
In 1940 pension age for women was cut to 60 to try to ensure for most couples that the married rate would be paid as soon as the husband reached 65.

1995 - women's state pension age to be equalised
Following pressure from Europe**, the Conservative Government was forced to announce plans to equalise state pension age for men and women. The timetable was the most relaxed possible and would raise pension age for women to 65 slowly from April 2010 to April 2020.

Yup, the people whining now have had over twenty years' fair warning.

* On a technical note, and what 'campaigners' like the Wfspe don't mention, the UK state pension is now moving towards a flat rate Citizen's Pension in all but name (hooray for that). The new system equalises the state pension between men and women, because of instead of having a low basic state pension based on years with NI contributions (tends to favour men slightly) plus the second state pension based on lifetime earnings (which favours higher earners = men), it is based purely on years with NI contributions or years with 'mother's credit'.

To eliminate the mothers' pay (or state pensions) gap (which is what the so-called gender pay/pensions gap actually is), women who have had children are given one year's credit for every year that they were not working but claiming Child Benefit, i.e. pretty much for every year of their adult lives, automatically.

So I (higher earner for most of my working life) will end up with less state pension than I would have done under the old rules, and plenty of lower earners esp. women will end up with more. Am I moaning? No, because that is A Good Thing.

** I take it they mean "The European Union", in which case one of the good things they did for us. But I bet the Remoaners never mentioned that.

Pensions, Tax Subsidies Charges and Incentives to Save

We recently enjoyed a lively exchange on this topic here.  And I said I’d write up something from experience on the coal face as it were.

First a little history.  Pensions originated much earlier than you might think. Quite a few centuries ago some notable taking on a Kings Patent was often obliged as the price to pay the outgoing tenant an income for life. Pensions are therefore strictly a regular payment to someone from someone else.  Annuities were sold by the government to raise money for wars. These annuities morphed into Gilts, which is largely why today annuities sold by insurance companies are mostly backed by Gilts, Gilt cashflows being relatively certain of being sustainable as they are funded out of taxation. By coercion if you prefer.  Private individuals could buy deferred annuities which came into payment at a set date or age in the future, the forerunner of today’s personal pensions.  In time large employers started to offer company pensions to their workforces.  These were offered not generally out of altruism but as an employee retention incentive. From memory at this time it was agreed between employers and the state that as company contributions were an expense they should be treated as pay, and as this pay would not be drawn until retirement age all income and capital taxes should equitably be deferred until those benefits were drawn, with the quid pro quo that the pension benefits – the ‘annuity’ – would be taxed as pay on the whole amount not just on the interest element.  Clearly these tax breaks were an incentive to join the company scheme or if you were a professional or self employed take out a Retirement Annuity Policy. So far so all well and good. 

Over the years as the size of the pensions fund grew it was obvious that the tax breaks were ‘costing’ the state revenue.  (In fact to align with the deferred pay philosophy) these taxes were not lost, merely deferred until the pension came into payment.

Also over time many insurers got in on the act, notably outfits like Hambro Life, Abbey Life and so on  - early examples of sales led unit linked insurers.  Some of the antics of their reps and the inveterate tendency for the state to prodnose into stuff led from the 1970’s to a series of official investigations and reports into pension and private savings, and various ‘reforms’ were mandated leading to the Financial Services Acts of 1986 which made some very fundamental changes.

In my view these Acts were very flawed, not because they ‘deregulated’ (which they did not – they introduced regulation) but because they made a fundamentally flawed intervention into the sanctity of private contract by forcing employer final salary schemes to make cash equivalent transfers of benefits to any member who requested one. This inevitably led to the pensions transfers scandal.  The problems with pensions do start there but the final nails in the coffin came under the New Labour government between 1997 and 2010. The worst financial services act ever, the Financial Services and Markets Act 2000 imposed an entirely flawed regime on the FS industry and effectively crippled company pension schemes.

In the above I have ignored the history of State Pensions, SERPs, S2P, Stakeholder, Auto Enrolment, etc. etc. all of which in one way or another have been largely flawed initiatives.  I have also ignored the failure of Equitable Life which gave me a great feeling of schadenfreude.

In any event pensions regulations themselves are now immensely complicated.  The Common Man has no hope of understanding them, at all.  And in my humble opinion there is no one man in the UK that understands them.  I have an employee who is nominated as our pensions guru and he is backed up subscription access to a specialist technical service who have specialists in separate bits of the legislation and rules.  That is a bill to my business of possibly £20,000 per annum – and we are a very small business.

Pensions Tax

As stated above pensions are deferred pay. The deal is that you pay no tax on the contributions you make, but you’ll be taxed on the whole annuity payment when you take your benefits.  I think that that is easy to understand, simple, and fair.

The question is what proportion of these tax breaks end up in the hands of the scheme providers?

Well, for defined benefits schemes of a reasonable size which are well funded and well run, the answer is not much.  The Trustees can access institutionally priced investment funds which have very low charges. Nil initial and as low as 0.1% TER (See below for TER explanation).  Where these schemes tend to lose out is when they employ ‘consultants’.  These are the usual rent seeking culprits like Capita or Aon (the latter has atrocious administration). I have seen the most stupid recommendations for investment from these outfits.  I also know that they routinely churned Group Personal Pension schemes for the initial commission.

For company money purchase schemes/GPP’s the same factors apply.  They can be run very efficiently, and we have done so.

Total Expense Ratios

These are now called OCR’s.  Ongoing Charges Ratio.

I started in FS in the late 1980’s.  By the early 90’s we were asking fund companies what their total charges were and the good ones would tell you.  In 1996 two blokes Paul Moulton and Hughes Gilibert set up Fitzrovia Fund Research to research and analyse funds costs.  That business developed the Total Expense Ratio methodology and was latterly sold to Lipper.  Gilibert and another ex-Fitzrovia alumnus now run fitzpartners.com.

The Fitzrovia data was used by many pensions (and fund consultants) to drill down into the full costs of fund management.  Good managers published their Fitzrovia TER’s on their own fund fact sheets.

If you want to you can Google these outfits and check their methodologies and see just how thorough they were in getting this data right.

Today, with their usual johnny come lately skill the regulators mandate the publication of TERs (now OCR’s) as if they’d just thought of it.

Fund Charges

Take two sample funds. One a global all cap equity fund the other a global bond fund.  A typical asset split in a pension would be 60% / 40% equity to Bond

Fund                                                                                                      OCR

Vanguard Global All Cap Equity Fund                  0.24% (Institutional class would be less)

Vanguard Global Bond Index Fund (hedged)       0.15%  (for the institutional class it would be 0.1%)

Total weighted OCR                                             0.20%

Pensions admin (Aviva Platform)                           0.25%  (This varies between 0.10% and o.40%)

Total charge                                                            0.45% per annum.

If you want / need to use the services of someone like us then that would be in addition to that figure and again would vary with both quantum and the extent of the services you wanted / needed.

Final Comment

There are lots and lots of investment managers and thousands and thousands of funds out there who charge a whole lot more and definitely soak up the tax subsidies.  This is especially true of things like VCT’s and EIS’s and Cash ISA’s.  And there are certain outfits who are notorious (IMHO) for overcharging, St James Place for example.

But without a shadow of a doubt you are perfectly able to operate a personal pension for less than 0.5% per annum all in.  The real problem with pensions costs is not the investment management – it is the stupid complexity of the rules and regulations arising from a history of utterly flawed interventions by governments and their bureaucratic Satraps.

(Apologies for the length of this. Also I completed it in haste whilst motivated)

Fun with numbers: Tax breaks for pensions vs UK annual deficit

From City AM:

Figures published today by HM Revenue & Customs (HMRC) showed the cost of tax relief on pension contributions rose by £950m over the last year to £41bn.

Other tax breaks on pension saving take the total cost to £55bn, Webb said, a figure the Treasury will be studying "with great interest".

OK, here's another figure that the Treasury ought to be studying "with great interest", from The Telegraph*:

Borrowing in the 2017/18 financial year to date is now running at £50bn, down from £56.7bn at the same stage in 2016/17 and the lowest to-date total since 2007.

The figure means Mr Hammond is on course to meet the target set by the Office for Budget Responsibility, the country’s fiscal watchdog, of borrowing £49.9bn in the 12 months to the end of March 2018 - equivalent to 2.4pc of gross domestic product.

I know that it's not big and not clever to compare random items of taxation and spending; or to match the total deficit with individual items of spending (or tax breaks, or subsidies), but it puts it in perspective. We could, in theory, more or less eliminate the current annual deficit by getting rid of tax breaks for pensions (more accurately, people with spare income, more accurately than that, higher earners, and even more accurately than that, subsidies for the lads in The City who soak it all up in fees, charges and commissions).

Broadest shoulders, and all that?
------------------------------
* Particularly sick-making is that the article makes great play of this factoid:

Public sector borrowing in December dropped by £2.5bn, much more than had been expected, thanks to a £1.2bn credit from the EU. It was the smallest December borrowing figure since 2000.

As if this £1.2 bn were a) some sort of triumph by the UK government and not just a drop in the ocean compared to b) UK deficits/spending or c) the massive overall drain that the EU is/will be or d) a completely made-up number.

Dear Daily Mail readers ...

... "My wife and I are soon to have a 'clean break' divorce. Her lawyer is wanting me to sign over the house in its entirety that I have paid for all my working life in exchange for not touching my pension."

There's no figures mentioned whatsoever to inform the advice.  But below the line, 'Just Retired' is winning the comments with 166 green arrows to 7 red.  Given that the correspondent mentions "the house in its entirety" and "all my working life" you'd have thought "his descendants" and "her descendants" would more than likely be the same people.  

And the voting in these comments says it all.  The fact the global equities have outperformed UK houses by about three to one seems to have completely passed them by.

But presumably at the crux of the problem is that the man would find it impossible to buy anywhere to live if he had to start again.  And so would his ex-wife, which is why she wants the house and not the pension.  As for what his job is and where he lives we're in the dark.

Economic Myths: Compulsory pensions saving

From medium.com: "There is no economic rational for compulsory superannuation".

He explains that forcing people to buy financial assets instead of funding old age pensions directly (via the tax system) is just another Ponzi scheme that will collapse under its own weight soon enough. Using the tax system at least has the advantages of predictability and low transaction costs.

I would add that the total return on financial assets is simply not enough to give all pensioners a predictable and adequate income in retirement. For sure, some people could, but that just reduces the pool of available assets/income for all other potential pensioners.

Somebody on Twitter followed it up with this from The Monthly: "Why compulsory superannuation benefits the financial industry and the rich at the expense of everyone else".

Crusty old misery-guts of the day (Ros Altmann edition)...

Doctor Rosalind Miriam Altmann (or Baroness Ros Altmann to her friends) has an inactive FCA registration.  So I'm not sure why she is giving financial advice in the Mail Online, but she is anyway and has joined the ranks of the bitter over 40's who want to get the Lifetime ISA binned because they are miserable about being nearly dead too old to qualify for the free £1,000 per annum.

Apparently she "... worries that young people who open one for any reason other than the short-term goal of buying a home will blight their finances for their whole lives."  Heavy stuff?  Well the ex-pensions minister claims "...using this as a pension has significant dangers you may not be aware of" and that the LISA "... is a complex product which could leave millions of young people poorer in retirement."

As per usual, Ros claims that the under 40's are too thick to understand they will lose any employer contribution if they opt out of workplace schemes in favour of the LISA.  Whilst she claims to support the Help to Buy ISA, she hypocritically states that young people desperate to buy property will shun pensions saving in order to save a deposit.  But this is only the start of the doublethink.

You see LISA's will hurt high rate taxpayers under 40.  Too stupid to work out that a 40% tax rebate is more than a 20% bonus, in the world according to Ros, the top earning 15% or so of the population will save in the wrong product.  But then again LISA's will only benefit the rich.  Because the basic rate taxpayers who can afford to use a LISA (with its minimum £25 a month contribution) after paying into an occupational pension scheme are rich aren't they?  Or God Forbid! people's parents will give them money.

The usual guff about the 25% penalty for early withdrawal(*) is trotted out too.  But the best bit, the real icing on the cake is this beauty:

"...pensions are taxable on withdrawals beyond the 25 per cent tax-free lump sum in later life. This deters people from spending the money too soon, which is the right behavioural incentive.
The incentive with a Lifetime Isa will be to take all the money out around age 60, and have nothing left for your 80s - in other words, the features of the Lifetime Isa mean it is designed NOT to last a lifetime."

Yes, the fact that for a basic rate taxpayer, LISAs are tax free on the way in AND on the way out is a disadvantage of the product!  Well I opened mine with Hargreaves Lansdown this morning and I'd encourage anyone else under 40 to do the same thing.

The banksters probably want get the policy binned in favour of more direct subsidies like Help to Buy where bonuses are only paid when the punter takes out a bank loan.  Whilst miserable old gits like Ros would quite simply rather the money was spent on people over 40 like themselves.

Of course the other drawback for the establishment is that if young people start paying attention to global financial markets, they might notice things like UK house prices being flat to down in all other major currencies over the last decade. Or that the US stock market has returned 250% since April 2007 in pounds sterling terms - yes, 250% even if you invested before the crash.  And we can't have that can we?  Who will buy all the overpriced houses from coffin-dodgers like Ros?

(*)pensions have a much greater 55% penalty for early withdrawal and £billions has been lost to pensions liberation scams because the government are too crap to regulate the pensions industry, but HMRC do still send the 55% bill to the fraud victim.

I work in Pensions and Still I Think that this is Wrong headed.

Here ....and it's not a 'raid' you numpties.  You haven't got anything to 'raid' until you've made the contribution.

The fact is that higher rate taxpayers mostly use pension contributions as 'tax planning'.  Given the new access freedoms for pension funds this will likely lead to obtaining contribution relief at higher rates and tax payments on benefits taken at the basic rate and a potential double benefit of tax free transfers on death.

In fact only a relatively small number of taxpayer benefit from higher rate relief for pension contribution.

I for one would wholly support restricting pension contribution tax relief to the basic rate.

More Bureaucratic Failure

One of my people is currently working through the pensions claims for a client of ours.  It's quite a lot of work as there quite a few plans, polices and investments and we are trying to get him a good deal and get it all nicely organised and set up, etc.

 

One of the plans is an old personal pension from a well known insurer with a guaranteed annuity rate (GAR).  The GAR is very good - 8% I think.  My colleague has 'advised' him to take this deal.

 

Now, if  we DO NOT 'advise' him and get him to declare that he has NOT received 'advice' on taking the GAR, the insurer pays us a commission of £1,500

 

On the other hand if we DO advise him and he DOES declare that he has received 'advice', then no commission will be paid, but the annuity rate will not be increased.  That is the insurer will trouser the £1,500.  (This commission cost is built into the contract at outset).

 

Yes, you read that right.  If we DO advise him we don't get the commission.  If we DON'T advise him we do get it.

 

This is the consequence of the rules set out in the Retail Distribution Review. (RDR).  You might not be surprised to learn that the RDR is viewed throughout the thinking part of my trade as a catastrophic failure. (See here).

 

Of course, the client is paying for all this failure. The incidence of regulatory imprests and deadweight costs falls on the client, not us. (FYI that cost varies between about 18% of revenue to 30% of revenue depending where your business sits in the financial services landscape).

 

(So what we will do here, what we are forced to do, is to game it.  The client will declare that he not received advice and we will take the commission.  And we'll offset it in full against our final invoice). 

 

Kafka would be proud.

Another Home-Owner-Ist milestone looms on the horizon...

Emailed in by Lola from CityWire:

Pensions minister Richard Harrington has said people should be able to use retirement savings to buy a house.

Speaking to New Model Adviser® at the Tory Party conference in Birmingham, Harrington, who was appointed as pensions minister in the summer following Theresa May’s post-Brexit vote reshuffle, said there is an ‘arbitrary’ line between saving for retirement and house purchase.

‘For most people there are two steps in their life [house purchase and retirement] and I think it is legitimate that the government should help with both,’ he said.

Previous Chancellor George Osborne had started gently swimming against the tide with his restriction for interest relief on BTLs and the extra 3% for buying second and further homes, but this man clearly is an utter, utter dickhead.

Sure, most people starting out in life would like to buy/own their own home rather than renting; and sure, retirees with some savings want to collect as much investment income as possible, whether that's dividends or rent from those people who would rather buy/own.

So it is a straight fight between young/poor and old/wealthy over available housing and it is impossible for the government to "help" (NewSpeak for subsidise) both sides as the effects cancel out! It's like sending weapons to opposing armies; good for weapons manufacturers and nobody else.

It would be a lot cheaper (for the taxpayer) and simpler to "help" neither side (again, current Chancellor Philip Hammond has had an outbreak of common sense and will shut down the Help To Buy subsidy at the end of this year) with a resulting fall in house prices. Win win win!

Proof that the Bank of England has absolutely no F*****g Clue...

Here

What an utter twat.

Update: 13:25

Proof that he's a twat. (Well, one proof factor in a whole range of factors).

Here

And this section is always worth a laugh for its endless contradictory news items.

Here

Economic Myths: Tax breaks for pensions reduce the burden on the taxpayer.

Mombers, in the comments to Lola's recent post about pensions and savings:

"Surely the purpose of any incentives is to provide enough private income to prevent OAPs becoming a burden on the state? If so, it doesn't matter what the person's income in their working life was. That said, I am a bit miffed that my enormous tax relief is all but certain to be cut :-("

My response, as tidied up:

M, yes that is how they always justify it but it is complete and utter horseshit.

Cost to the taxpayer of basic state pension = £50 billion a year.

Cost to the taxpayer of second state pension = £40 billion.

Cost to the taxpayer of top-up payments of Pensions Credit, Housing Benefit and Council Tax Benefit for pensioners with no SSP or private pension = approx. £15 billion.

Cost/value of pensions tax breaks = £40 billion.

Of necessity, a lower tax burden on income channelled into private pensions = higher tax rates on everybody/everything else.

Number of pensioners currently NOT claiming top up benefits who would be claiming them if it hadn't been for pensions tax breaks = very, very few indeed.

Saving to the taxpayer from not having to support these very, very few pensioners = a very, very small amount.

So they are spending/overtaxing by £40 billion a year to save the self-same taxpayer £5 or £10 billion at most.

That is fucking awful value for money, targeted at the wrong people and imposing higher tax rates on everybody/everything else.

Please don't take away our subsidies! We'll be straight out of business!

From The Evening Standard:

Cash-strapped Chancellors should not be given the temptation to take two helpings of tax from pension savings, the boss of the UK’s biggest mutual life and pensions firm, Royal London, has warned.

Chief executive Phil Loney spoke out on the Treasury’s review of pension tax incentives unveiled by Chancellor George Osborne in July’s Budget.

One of the options being considered is a reversal of the current regime — where pension contributions are tax free with tax deducted on retirement — to a system where contributions are taxed but payouts in retirement are tax free.

But Loney says the potential change — alongside reducing the size of pension pots — hinges on future Chancellors sticking to their promises. “Nobody should be asked to save for 30-plus years without absolute certainty that savings made from their income will not be taxed twice. The public will not trust future cash-strapped governments to honour any current promise of a tax-free ISA-style income in retirement.”

Wel of course they won't! But in the absence of the supposed tax breaks, nobody in his right mind would save into formal 'pension' arrangement in the first place, they would just build up cash, buy shares (presumably in an ISA*) or get into buy-to-let**. Even if they were 100% certain that withdrawals of saved up capital from the fund would not be taxed (a second time) in future, a formal pension scheme is hugely inflexible and suffers colossal charges.

So basically, without the tax breaks (which are all siphoned off by the pensions companies, leaving the saver no better off that if he had saved up outside a pension scheme), the whole pensions 'industry' will shrivel up and die within months.

*With ISAs, there is always the risk that the income and CGT reliefs will be withdrawn, but it is nigh inconceivable that the principal amount will be taxed, seeing as it was saved up out of post-tax income.

** With buy-to-let, there is always the risk that a Chancellor will reduce the tax breaks - a Labour Chancellor might do in the interests of fairness, redistribution or simply 'bashing the rich', and a Tory chancellor might do it because he knows that tenants don't vote Tory so he might find it expeditious to budge a few landlords into selling up to sitting tenants. Oh, a Tory chancellor just did, and presumably for exactly that reason. But it is again nigh inconceivable that the there would ever be a tax charge on the principal amount.

Fun with numbers

From City AM:

This week, fed-up Londoners will be forced to endure two more Tube strikes.

And this despite Transport for London having already offered the unions: a two per cent salary increase this year, inflation-protected rises in 2016 and 2017, a £500 bonus for all staff on Night Tube lines, £200 extra per Night Tube shift for drivers, and the freedom to decide whether or not to work Night Tube shifts at all...

Accepting these demands would require a fare rise of 6.5 per cent or an extra £152 per year for a Zone 1-6 Travelcard. Clearly, this is unacceptable.

The article includes a long list of ostensibly sensible cost saving suggestions, such as driverless trains.

But he is jumbling several quite distinct questions, for example:

1. Are London commuters prepared to pay 6.5% more on their Travelcards in exchange for a 24-hour Tube? Is it worth £3 extra a week on your Travelcard to be able to stay out as long as you like without getting stung for taxi fares home? What about people who work night shifts, this will be a boon to them. Etcetera.

2. To the extent that sensible cost savings can be made, should those be reflected in lower ticket prices or a lower subsidy from the taxpayer?
---------------------
Via, MBK, a shock horror from The Sunday Times:

NEARLY two-thirds of people due to retire next year will receive about £116 a week as their new “flat rate” state pension, rather than the full payout, a Freedom of Information (FoI) request reveals today...

The reason many people’s incomes will be slashed is because they have spent time “contracted out” of the state system. Simply put, this means that they paid lower national insurance (NI) contributions during their working life, and this will be taken into account under the new scheme.

If you were in a final salary or career-average pension scheme, you will have paid a lower rate of NI in return for giving up your entitlement to the government’s earnings-related pension top-up. This top-up, called the state earnings related pension scheme (Serps) and later the state second pension (S2P), is currently added to the basic state pension.

If you were in a personal pension or defined contribution workplace scheme, you will have paid the standard rate of NI, but some of it will have been paid back into your private pension pot.

For a start, this has been known for years, and secondly, that all seems perfectly fair and reasonable to me.

Those who 'opted out' must have known that they were swapping a lower state pension in return for a higher private or employer pension. Doing otherwise would be a retrospective subsidy to the 'pensions industry'.

True cost of Labour's pension tax raid: the square root of fuck all.

The Telegraph is still pumping out the line that Gordon Brown's Pension Raid has cost the "taxpayer" a cumulative £100 billion since 1997.

Bollocks.

Rounded to the nearest £ billion or per cent...

Back in 1996-97

The mainstream corporation tax rate was 33% and the ACT credit which pension funds could reclaim was 1/4 of the cash dividend received.

* Total UK plc profits (say) £80 bn, corp tax payable £26 bn = post-tax profits £54 bn.
* Half of the £54 bn post-corp tax profits paid out as dividends.
* Half of retained profits and half of dividends belong to/paid to pension funds.
* Pension funds suffered £13 bn corp tax indirectly (half of £26 bn) and reclaimed £3 bn ACT (1/4 of the £13 bn cash dividends they received) = net direct and indirect tax bill £10 bn.
* Average tax rate 25% (£10 bn divided by half of £80 bn).

1997-98

Mainstream corporation tax rate 31%.

* Total UK plc profits (say) £80 billion, corp tax payable £25 billion.
* Pension funds suffer half of that corporation tax = net indirect tax bill £12 bn.
* Average tax rate 30% (£12 bn divided by half of £80 bn)

So yes, initially this was a modest increase in their overall tax rate and a modest increase in their overall direct and indirect corporation tax bill of £2 or £3 bn.

2015-16

The mainstream corporation tax rate is 20%, half paid out as dividends and half belongs to pension funds.

* Total UK plc profits (say) £160 bn, corp tax payable £32 bn.
* Pension funds suffer half that corporation tax = net indirect tax bill £16 bn.
* Average tax rate 20% (£16 billion divided by half of £160 bn).

This is now lower than the overall average rate they were suffering pre-raid.

In summary

You can reasonably argue that pension funds 'lost' £2 or £3 bn in 1997-98 compared to 1996-97 but in the meantime, they are 'winning' about £4 bn a year i.e. instead of paying overall rate 25% on their half of £160 bn, they are only paying 20% overall rate.

I'm not sure when the break-even year was, but all things considered, the losses and gains net off to a very small figure, nowhere near an overall loss of £100 bn and quite possibly a small overall gain. If you want the Excel formula, it is "=FA^0.5".

And of course, pension funds are not "the taxpayer". Everybody else is clearly miles ahead of the game as his overall indirect corporation tax bill is now 13% lower than eighteen years ago.

Why You Should Vote (2)

From the Conservative mainfesto (p65):

continue to increase the State Pension through our triple lock, so it rises by at least 2.5 per
cent, inflation or earnings, whichever is highest

From the Labour manifesto (p48-9)

We will keep the triple-lock so that the state pension increases by inflation, earnings, or 2.5 per 
cent, whichever is highest

From the Libdem manifesto (p49)

Legislate for the Liberal Democrat ‘triple lock’ of increasing the State Pension each year by the highest of earnings growth, prices growth or 2.5%.

From the UKIP manifesto (p20)

The ‘triple lock’ now guarantees the state pension will increase each year by the higher of inflation, earnings or 2.5 per cent.

There's no good reason for pensions increasing by a minimum of 2.5%. If wages and inflation are rising by less than that, it's simply a giveaway. And it's being done for one reason and that is that pensioners vote a lot more than young people. Over 65s had a turnout rate approximately 1.5 times higher than 18-24s and approximtely 1.3 times that of 25-34s (section 2.3 of this).

All that parties care about are people who vote. That's how they win. They might pay lip service to the concern of people not voting, but unless they think it's affecting a group that generally votes for them, they aren't going to care too much.

Pensions. (I am lost for words)

I detailed a colleague to be our Auto-enrolment Guru. Here's his latest analysis.

Various Trade reports in the financial press, coupled with murmurings and press releases from corporate and stakeholder pension providers, suggest the future for Auto-enrolment is far from rosy.

Legal & General are pushing to have “Opt In Members” excluded from the legislation,  Now Pensions and Scottish Life are saying the costs are getting higher and Aviva (who have taken over Friends-Life) and saying the regulatory cost cap and Pension Regulator funding contribution is going to make pension provision for small schemes uneconomic.  In principle this will leave NEST to be the sole provider and much of their overhead costs are met by Central Government anyway.

The Peoples Pension scheme has set their fee at 0.5% AMC; for funds under management,  Now Pensions is 0.3% Plus £18 pa per member admin charge and NEST is 0.3% plus 1.8% admin fee on all funds

Industry Talk suggests most pension providers saddled with firms forced to enrol with less than ten members will be totally uneconomic to take under their wing  and many are not prepared to state that their schemes will meet pension regulator approval and planning to reject  access to schemes with 50 members or less. They  calculate based on National Earnings of 21,000pa  and assuming late staging date pension premiums totally 8%, that small size firms of ten people will produce £16,800 of pension premiums  per annum.

That equates to the Peoples Pension charging £84.00 per annum per firm, Now Pensions £230.40 and NEST £352.80

Although the funds under management will rise, providers are quick to point out that the “Fraud Levy” of £230 will be applied to providers, not employer firms, and the “Pension Regulator “ is yet to decide what charge to levy on the industry for its increased role in policing the legislation and issuing Certification. It seems the overheads will exceed the benefits and pension providers are not now prepared to offer any guarantee that their scheme will comply with the requirements  of the regulator and aim to suspend auto-enrolment in 2016.

Maybe our research is wrong..?