Home—Blog—How a think tank plans to steal the savings of 23 million people
Feb 21, 2012, 10:12
Posted byMerryn Somerset Webb
Comments (14)
A few months ago, I was sent some details on a new book by Guy Thomas called Free Capital: How 12 Private Investors Made Millions on the Stock Market. It tells the encouraging story of how a group of ordinary retail investors made small amounts of money into large amounts of money by clever investing and looks at what their strategies had in common.
The answers are not particularly surprising. They tended to focus on smaller companies. They had saving personalities – long histories of giving high priority to “learning, earning, saving and investing.” They lived modest lifestyles, seeing “money as a means to freedom, not consumption.”
They kept their risks low by avoiding leverage. Finally they saw investment as a “craft not a science” - they used relatively simple analysis and rules and avoided all academic investing theory on the basis that too much study would be like “learning physics to play snooker” as one put it.
This all sounds good, but there are two more elements that need noting. One is luck – all good returns have a huge element of this involved. The second is tax avoidance, something that half of the case studies used to make their money work for them. Six of the 12 were Isa millionaires: they made their fortunes in part because they were able to pay no capital gains tax (CGT) and no income tax on their returns.
You might be impressed (as I am). But if the think tank Social Market Foundation (SMF) has its way, this way to wealth will be closed off and those who have large amounts of money in Isas already, will be in for a very nasty shock.
Have a flick through this report from the group and you will soon see why. Most of it isn’t particularly controversial. Indeed it represents almost a left/right consensus in its general ideas.
It says the UK government must continue to cut the deficit, and one distant day, the national debt too. It says that it must also do something about growth. It says that means radical action. It says radical action involves changing the tax-and-spend make up of the economy – shifting it so that consumption and investment rise.
Then it suggests ways of making large savings in order to release cash to redirect towards growth policies (by which it means infrastructure spending).
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So far, so much discussed (and not so radical). The same goes for most of the proposals: SMF wants to cut tax relief on pensions for higher rate taxpayers; it wants to shift child benefit payments into the tax credit system; it wants to cancel free travel for over 60s; and it wants to axe the winter fuel allowance and free TV licences for all but the very poorest pensioners.
I’m not sure I agree with all these, but they aren’t exactly new thoughts. But then there is a blinder. SMF wants to cap all Isas at £15,000. Not cap contributions, but cap the total amount you can have in an Isa. At the moment, well over 20 million people have Isas. Two thirds of those people have more than £15,000 saved in them. SMF doesn’t like that.
Why? Because people with £15,000-plus in savings are exactly the kind of people it thinks have what it calls “financial headroom” and should therefore be encouraged to consume rather than be subsidised to save. Uncapped Isas are to SMF “expensive giveaways that drain demand from the economy and reinforce domestic household imbalances.”
This is an odd one. I can see you could make an argument for setting some sort of future limit (as has been the case with pension pots) if you really believed that the problem with the UK economy is that its population refuses to consume enough, or if you wanted to prevent the rise of too many Isa multi-millionaires.
But retrospectively capping Isas at a very low level and bringing back into the tax system the hard-won savings of 23 million UK adults seems like an extraordinarily destructive thing to do. It would cause unbelievable admin trouble for everyone; investors and taxmen too – most people barely invest outside an Isa because they can’t cope with figuring out income tax on dividends and the like.
I’m also not sure it would necessarily work to increase consumption much: at times like this, people are as likely to save more to make up the difference lost as they are to risk their personal futures by running down their financial security blankets in response to tax changes.
But more importantly than all that, this plan would break the implicit contract the government has with the population not to indulge in retrospective rule changes.
You could say that taxing Isa money is effectively to introduce a wealth tax, and that all wealth taxes break a political contract of some kind (if there is no tax on big houses when you buy a house, is it fair for a state to impose one later?).
But wealth taxes, as the British tend to understand them at least, are designed to hit only a small percentage of society. Capping Isas goes for the jugular of almost every saver in the UK. There is already very little trust to spare between leaders and electorates here. This wouldn't exactly help with that. It is a very bad idea in a relatively reasonable report.
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(21 February 2012, 12:08PM) Complain about this comment
Ouch. Luckily, this would be very unpopular with the electorate, but history shows us that doesn't often stop over-indebted governments from implementing financial repression and capital controls...Notice that this sort of rule is unlikely to affect the truly wealthy - i.e. those with land. What this country, and in actuality, the developed world needs is a tax on land. We are still living with the effects of a feudal system and those with the power to change the rules are disinclined to do so because they are the ones who own multiple properties / land.
(21 February 2012, 01:29PM) Complain about this comment
Of course for many ISA millionaires the ISAs already are taxed. At death any saving accumulated in an ISA are subject to inheritance tax even if the ISA only increased in value to keep up with inflation. You can't gift an ISA so avoiding IHT is difficult.What this report shows is that they are so eager to steal whatever they can from savers that they haven't even the decency to wait until the saver is deadWas there anything in the SMF report about imposing compulsory organ donation on the rich? After all many people live quite adequately on one kidney so two are just luxury.
(21 February 2012, 01:31PM) Complain about this comment
Sounds like another muddled-thinking way of promoting the wrong kind of growth. Savings aren't sitting idle - or at least they shouldn't be - they're either directly or indirectly being pooled and invested by the institutions offering the return on the amount being saved. So in fact savings should be encouraged (win for the saver, win for any institution in the middle, win for any business benefiting able to access the cash). Meanwhile the really idle money is being held in all the over-sized mortgages out there. If you've got a mortgage you're not spending because you're worried you may not be able to pay it off. If you haven't got a mortgage, then chances are you're saving up to be able to afford one. Seems to me that not propping up property prices through quantitative thieving would be a much more efficient means of putting money in our pockets.
(21 February 2012, 01:36PM) Complain about this comment
"if there is no tax on big houses when you buy a house, is it fair for a state to impose one later"There is stamp duty! But of course this is entirely optional as it's cheaper to plonk the house in a company and avoid ever changing the title at the Land Registry if it's a really valuable house. All the more reason to scrap stamp duty - a tax on labour mobility, but only for Leona Helmsley's famous 'little people'. Replace with an annual tax which is roughly equivalent to stamp duty amortised over 10 years, payable in perpetuity. No more avoidance and it can open the public's mind to shifting the burden on tax from desirable activities (work, profits) to less desirable activities (land speculation)
(21 February 2012, 03:53PM) Complain about this comment
The value of the property has increased substantial the last decades, surely if the goverment wants to gain more revenue they should be aiming at a Land Value Tax (for expensive properties and BTL)!Surely they should not try to have a go at our savings again. BOE's and Osborne's inflation is doing enough damage on its own the last 3 years.
(21 February 2012, 06:20PM) Complain about this comment
There is a very simple way to increase consumption-investment and achieve the growth which will eliminate the National Debt? How? Create a law that all property can only be transferred from one generation to the next completely free of charge. This would lead to a nation of property owners, very few ever again paying rent or mortgage. Think how much capital the readers of Money Week have tied up in property, or pay out monthly in rent and mortgages.. maybe 30% or more of income.. all that could be freed up to create genuine growth.How it would work... When someone no longer needs their house (death, going to live in a relative/friend's house, community, sheltered housing etc) it cannot be sold. It must be transferred free of charge to who ever they like (eg their children/grand-children, friend, someone deserving etc) as long as that person does not currently or has previously owned a property. A similar idea can be applied to business property.
(21 February 2012, 06:23PM) Complain about this comment
If you have had a property and lost it for various reasons... that is your chance gone, you are not eligible for this free transfer system. Government is constitutionally prohibited from taxing such a transfer.In the case of someone who genuinely needs to sell a house in order to relocate, down or up-size, etc they are free to sell at any price they can get, whenever they like. The funds must be paid into an official holding account (paying interest) until they buy another property. Any surplus will be donated to a national account supporting social housing.In a stable population generally enough houses already exist, so why do we perversely make each generation, with enormous financial difficulty, buy them all over again and again? It is unnecessary. In an intelligent, benevolent, civilized and generous society one generation would naturally wish to pass on its wealth free to the next. Creating a system that allows this to happen results in great benefit to the economy.
(21 February 2012, 09:46PM) Complain about this comment
If anyone trusts governments then they need their heads testing.!!!Let me tell you this, when the Banks in europe implode over the next few years you can kiss your guarantee of £85.000 protection good bye, the governments will have enough on their plate trying to keep the banks and country a float (All bets will be off)TRUST DON'T MAKE ME LOL !!!!!!!
(21 February 2012, 10:28PM) Complain about this comment
They can't even spell 'TV Licence' correctly in the 'report' so why should I trust a word of it?ISAs. According to the report, enforcing a lifetime limit of £15,000 would enable "precisely the households with spendingheadroom, who should be encourage (sic) to use it rather than save yet more". Goodness - who said this was the 'Age of Austerity' ?The whole idea seems ill-considered.Next up - "Cut Winter Fuel Payments and free TV licenses (sic) to all but (the) poorest pensioners". Am I really reading this correctly? - "all but the poorest". How are the "poorest" going to be determined? Is there going to be an annual threshold below which you're deemed to be "poor"?Here's my own "recommendation" - all 'reports' which claim to be written by so-called experts will be recycled as toilet paper.
(22 February 2012, 12:30PM) Complain about this comment
Well, it was only a question of time. They are talking seriously about changing the taxation of pensions, and further reducing the amount that can be saved into pensions. Many people use ISAs as a substitute for pensions, getting no tax relief on the money they pay in, but getting it on the money they take out, making it much less complicated for the retired persion to complete tax returns.It is only logical that the tax authorities should also wish to cap the amount of capital that can be held in an ISA - plausibly at the same limit as for pensions.
(23 February 2012, 01:46PM) Complain about this comment
Colour me not surprised. This is what is inevitably going to happen when governments are desperate for cash and the economy has gone down the pan. More tax.Oh, and as OhNo says they've used the US spelling of 'licence'. An unintentional slip perhaps, but an accurate one.
(24 February 2012, 07:51PM) Complain about this comment
Er ...I work hardI get paidI spend what I need tooI save as much as I canI don't take on debt I can't affordI pay my bills on timeI thought I had a sensible model ....... What did I miss ?
(24 February 2012, 10:25PM) Complain about this comment
#12 Dave. Carpe diem. If you die in debt you make a profit out of life.
(25 February 2012, 03:22PM) Complain about this comment
639826I looked up the Social Market Foundation on Wikipedia and learned that this think tank was set up by followers of Dr David Owen folowing his split with the SDP. I concluded that this think tank is a vehicle for would-be politicos to practice policy formulation, safe in the knowledge that without political connections and influence, their whacky ideas are unlikely ever to come into force. I have a hazy memory of PEPs being established during the Thatcher years, and their benefits being substantially preserved when PEPs were remodelled as ISAs during the 1997-2010 Labour governments. The present Coalition government has increase the ceiling for annual additions to an ISA from £7,200 to over £10,000. There doesn't appear to be much of a political head of steam behind the proposal to reduce or cap ISA benefits, and I for one won't be losing any sleep over the SMF proposal.
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