Julian Knight: We can't afford to rob the future to feed the present
Pension money should not go to reduce taxes
Sunday 19 February 2012
I am in a bit of a quandary. You see, I totally agree with Danny Alexander and the Coalition Government's ambition of raising the income tax personal allowance as soon as possible to £10,000 and beyond.
It's by far the quickest and simplest way to help out low-paid staff and to encourage those stuck on benefits to find work. Even senior Tories at the time of the election said that they wished that they had made the £10,000 commitment on the personal allowance. Now it's a key plank of the Coalition agreement.
I am also, apparently, in agreement with Mr Alexander over the potential scrapping of higher-rate tax relief on pension contributions. It's absurd that about three quarters of all the cash paid out in pensions tax relief goes to the 10 per cent of the nation's top earners while the rest have to make do with a far more meagre 20 per cent boost.
This has been a blatant wrong supported for decades by politicians and the pensions industry who themselves benefit hugely from it. It helps exacerbate the income inequalities in the workplace right into old age.
So you'd think I'd be happy about the way in which these twin policies seem to be coming together in time for the Budget. Mr Alexander is believed to favour using the billions saved by scrapping higher-rate pensions tax relief for the personal allowance. But I don't think this is a good idea at all. Let me explain why.
This is effectively a raid on pensions – pensions of the wealthy, admittedly – but a raid nevertheless, and the money could be used to fund a tax break today. Yet again it will be an example of our society choosing the here and now over provision for the future.
Tax cuts are good, and I argued a fortnight ago that we need a small one to boost economic growth and spending, but to fund it from pensions is a truly retrograde idea. This does not mean I want the status quo to stay over tax relief on pensions – it's wrong. What I'd like to see is the end to higher-rate tax relief but for this money to be redirected to give basic-rate taxpayers a higher relief on their pension contributions. This would encourage the millions of people who aren't saving enough right now for their retirement to save more – and stop the gravy train for the rich.
The precious money we already have in pensions needs to stay in that sphere and not be used to supplement current spending. If Mr Alexander wants to achieve the ambitious but worthy goal of the £10,000 personal allowance he needs to fund it from elsewhere. He should not rob the future to pay for the present.
The West's house of paper
Talking about robbing our future, I am reading Planet Ponzi by the former hedge fund manager Mitch Feierstein. It's a description of how we in the West have given away our economic hegemony in a few short years – a sort of "How the West was lost" if you like.
Mr Feierstein outlines, in simple terms, the mistakes that have been made by global policymakers to leave us in a position where we in the West are massively under-competitive, over-indebted and ruled over by, in any truly objective analysis, bankrupt governments, flinging out potentially worthless paper to be gobbled up by investors who are clueless as to what they can buy instead. The description of a Ponzi scheme is very apt. And in a week when Moody's moved the UK to a negative outlook, Mr Feierstein's book is a reminder that things could well get a lot worse in coming years and decades.
Less interest in interest-only
Before the banking crisis, one in three homeowners took out an interest-only mortgage. If you're one of these you probably regret the decision. House prices have fallen in most parts of the UK – although not in London and the south-east – in essence undermining the purpose of interest-only loans in the first place. Now more woe is to be piled on these people with Santander reducing its loan-to-value on interest-only mortgages to 50 from 75 per cent, while there is a rumour that another major lender is set to get out of the market altogether. Other lenders, such as Woolwich and Lloyds, are asking their interest-only borrowers to provide clearer evidence that they have an investment vehicle in place to repay the capital sum owed. In essence, the interest-only market is constricting and anyone with this type of mortgage should urgently review where they stand and consider a remortgage to a repayment home loan quickly.
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