FOOL'S EYE VIEW
A Motley Fool Manifesto

By Christopher Spink
May 4, 2001

Next week most people expect the Prime Minister to call a General Election for 7th June. Politicians of all hues will be desperately trying to catch your vote. However, what should convince you to give any of them your backing? Perhaps most persuasive is what politicians plan to do with the pounds in your pocket.

Here at the Motley Fool we're keen on encouraging as many voters as possible to save for the long term. So I've set out a series of points which we'd ideally like to see adopted as policies to make personal finances in this country much better. If a politician comes knocking at your door press this into their hands!

Simplify pensions

Pension provision has become unnecessarily complicated. This is unfortunate at a time when saving for one's retirement is becoming more important than ever. The state pension will not suffice. It's currently worth £72.50 a week and looks set to dwindle in real terms over the years. At the same time people are living longer and having to finance retirements on average three times longer than those of their parents.

But pension policy is in a muddle. The state can't fund your twilight years, either through the basic pension or SERPS. Companies have scrapped most of their final salary schemes. Personal Pensions, introduced by the Tories in the 80s, have been discredited for their confusing and crippling charging structures. And stakeholder pensions don't look like attracting those on low incomes.

Introduce lifetime retirement accounts

So to encourage everyone to save, which is the only solution to this crisis, the next Government should set up a lifetime retirement account similar to US ones. This would be a flexible system whereby anyone could contribute to a savings scheme, rather like an ISA. It should have maximum charges, similar to the CAT standards of no initial fees and only 1% charges per annum, tops. Any gains and income made would be completely tax-free.

To encourage people to use this vehicle perhaps tax "relief" on pension contributions should be scrapped as well. At the moment most pension schemes are marketed using their tax benefits. For every 78p of taxed income put into a pension by a basic rate taxpayer, the Government contributes a further 22p. However, income from pensions is taxed, although you can draw down 25% of the pot as a tax-free lump sum.

Scrap compulsory annuity purchase

In order to placate those already paying into pension schemes, restrictions should be lifted about what pensioners can do with the money they have saved up. At the moment a quarter of this can be taken as a tax-free lump sum, whilst the rest has to be used to buy an annuity. This is an instrument that pays out an income for life. Annuity income returns have fallen recently and the capital could be better used elsewhere.

If the Government is worried that unruly pensioners may spend all their lifetime savings and then fall back on the state for support, they could insist that some of the pension money is put towards an annuity that meets the minimum income guarantee or MIG. The MIG is the level at which the Government will pay out income support to pensioners, currently standing at £92.15 a week. That equates to £4,791.80 a year. You would need a pension pot of roughly £95,000 to buy an annuity paying out that amount.

Of course a lifetime retirement account would need one other restriction: that the fund could not be touched until the age of 50.

Scrap tax on savings and capital gains

At the moment, as a nation, we only save on average 5% of our disposable income. 16 million have no savings at all. To encourage more people to get into the savings habit, tax on any interest and dividend gains up to a certain level should be scrapped. Most people who save money monthly are putting in cash that they have already earned and paid income tax on in any case. The Conservative party is proposing to end this "double taxation" of interest on savings for basic rate taxpayers.

In addition, the complicated capital gains tax (CGT) should be scrapped. At the moment no CGT is payable on the first £7,500 of gains realised in a given year. This limit should be retained. But any gains taken above that limit should be treated as additional income and taxed accordingly. Thus if you are a basic rate tax payer you should be charged 20% on it and a higher rate payer should pay 40%. But this would still leave people with the horrendous task of calculating liabilities on gains so maybe CGT should be scrapped altogether. 

Stamp Out Stamp Duty

Finally the Government should end this outmoded transaction tax on share dealings. At 0.5% per share purchase, this is punitively expensive. Most EU countries do not have this trading tax, and those that do, levy it at a much lower level. Germany, Italy, Spain the Netherlands and Luxembourg do not impose the tax at all while France has a rate of 0.3%. In the United States the transaction tax is 1/300 of 1%, or 0.0033 per cent.

Stamp duty discourages private investors from building their own portfolios (and reducing their reliance on the State for support). It discourages investment in British companies. And most important, given the competition in the global marketplace, which is becoming ever more open and accessible, the position of the City of London as a major trading centre is threatened. If people have a choice of where to shop, as recent supermarket price wars show, they will search out the value and trade there.

N.B. These are only my own opinions, not the official views of the Motley Fool.

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