Two years ago, I wrote an article here saying that the average mainstream fund manager was grotesquely overpaid for doing what is little more than a middlingly skilled admin job. I therefore suggested that, henceforth, all funds charge on a flat-fee, rather than a percentage, basis.
I’m still replying to the emailed responses. In my email inbox, I created a folder called “Cross Fundies” – and I have another ten to 20 to messages to get through.
But the hornets’ nest I unwittingly stirred up back then is nothing compared to the one I poked last week. So I have created two new email folders to take the place of “Cross Fundies”: “People who think I am brilliant”, and “People who think I am an idiot.” Obviously, I’ll be replying to those in the latter folder first.
This time, the issue that divided you was the pensions system. I argued that it is so complicated, so reputationally damaged, so open to exploitation and so underused that it should be abolished and replaced with an extended version of the savings vehicle that everyone understands and likes: the individual savings account (Isa).
Those who agree do so for much the same reasons that I gave in last week’s column. They have found their pension arrangements to be opaque and confusing; they have been regularly overcharged; their returns have been unexpectedly low (often due to the charges); and they have been maddened by the constant changes to pension regulation.
Most of all, however, they said that the inflexibility of their pension bothered them. They’d rather skip the joy of getting income tax rebated on the way in, in favour of the flexibility and simplicity of an Isa wrapper.
That way, they get to be in control; they can keep things cheap; they can take money when they want it; and – best of all – they know their Isa money isn’t liable for any more tax, as long as they live.
One reader wrote to say he has an income of £50,000 generated mainly from Isas and their predecessors, personal equity plans (Peps). His annual tax bill? £600. I bet that feels good.
Happiness studies tell us that, once basic needs are taken care of, it is certainty that makes people most content (and uncertainty that makes them most anxious). That’s why so many readers have chosen Isas over the “inexplicable garbage” of pensions – even when a pension is generally more financially beneficial.
It is also why they aren’t alone. Last year, £15.8bn was saved into Isas, but only £14.3bn went into pensions. Isas are seen as safe tax-free wrappers, pensions as ripe for being consistently fiddled with by the state. Another reader summed it up: “I do not understand pension legislation, but I know that either the government or the pension provider will have figured out a way of getting their hands on my money before I retire.”
But what of those who think this is the stupidest idea ever? Interestingly – and in a marvellous example of how easy it can be to miss a point – most of them accused me of not understanding the various complications of the pension system. Do I not see that it is a “no-brainer” for people who get employer contributions? Do I not see how the system can allow 50% taxpayers to avoid the top rate? Do I not see how good it is for people who are rebated 40% tax on the way in, but only pay 20% tax on the way out? Do I not understand “gross roll up, income tax savings, inheritance tax (IHT) savings, national insurance savings and death benefits”?
Actually I do. But all these seem to be not so much arguments in favour of a complicated system, but explanations of how those better off can use pensions as a tax management system – with pension professionals taking a cut along the way.
If the aim is to give everyone a reason to save for the long term (which it is, isn’t it?) that’s not really good enough.
There are some good arguments against my ideas, too. One is that Isa money can be squandered. Yet this problem is easily prevented – for example,
by having people hold back a minimum amount (rising as they near retirement). It can also be prevented by making Isa capital free of IHT. Who would spend it then if they didn’t have to?
However, the best argument is the fact that past performance is no guide to the future. Isas haven’t been much meddled with so far. But if they were rejigged to replace pensions as our retirement savings vehicle, they would surely also replace pensions as the number one target for pointless micro managing.
It’s a risk. Governments go where the money is. But, given the upsides, I still think it is a risk worth taking. Chile has a much-admired system that is similar, and other countries have been experimenting with a “personal pot” style system.
Do you have the ear of George Osborne, asked one reader, or is this all “wishful thinking”? I can’t answer that either way. Osborne hasn’t yet sent me anything for my “I am brilliant” or my “I am an idiot” folders. I like to think he is mulling it over.