“HMRC gives tax relief when pension contributions are made and allows pension capital to grow tax free but then recovers the tax revenue foregone by levying income tax on the stream of payments made when the pension capital is eventually withdrawn. If you retire on capital saved outside a pension scheme, you will have less capital but it will be very lightly taxed. If you retire on capital saved inside a pension scheme, you will have more capital but most of it will be taxed as if it were income, even though it is only your capital coming back. There is some proportion of the pension capital subjected to this conversion to taxable income at which the two forms of saving are roughly equal in terms of the present value of after-tax amounts. For high earners, that proportion works out as about 75%. So, with 25% tax free cash, there is equity between different generations of taxpayers.”

The effect of the conversion of pension capital to taxable income (which is what ensures the next generation gets a a ‘dividend’ for providing tax relief at the point of saving) often gets overlooked when making savings choices, including by many accountants and financial advisers. The maths favour pensions clearly only where there is a lower expected tax rate in retirement than in employment – something you will not be sure of when making the choice.

As part of their initiative, Citywire asked me last week, as one of ’a group of seasoned investors’,  to come up with three pieces of advice I would give to investors who are starting on ‘the long term savings journey.’ As if a few nuggets of pithy wisdom or practicality could break through the defences of the wilfully disengaged! As if they will even be among the 1.5 million annual unique visitors to Citywire Money’s website!

My first thought was they really only need two: ‘wake up’ and ’smell the coffee’. I really do believe the wilfully disengaged, whether or not part of the ’something for nothing’ brigade, will respond better to the stick than the carrot - and probably not until the stick, too late, has struck them hard where it hurts.

My second thought was that you can’t fight resignation with resignation. Maybe even amongst our own clients there are some who had been previously disengaged or lazy. What worked for them? That prompted three nuggets which I duly sent Citywire.

1. Visualise your past, from the future: imagine yourself in the autumn of your life looking back and thinking what would make you feel ‘job well done’ and what would have caused you most regret. Anything involving  money!
2. Ask for help: everything is easier with a plan but turning your ‘no regrets’ future into a plan requires professional help. Go see as many IFAs (not your local bank, please) as it takes to find the financial planner who ‘gets the visualisation thing’.
3. Pay up for planning and pay down for products: this is the opposite of what people think (and the industry wants you to think) but planning is your key and products are really only commodities, so keep them basic and low cost.

The shadow Chancellor is wrong because less austerity would almost certainly have translated into a weaker pound, even higher inflation and higher borrowing costs – for home owners as well as HMG – which would have left us in a worse place than we are today. This is the realpolitik of the Coalition’s economic strategy and it was essentially what George Osborne needed to say today. He will be saying it a lot more.

Politicians do not dare to put it so bluntly (although Alistair Darling, to his credit, did) but the way out of a debt-induced crisis is always some form of ’workout’ and that needs time. Coalition policies have bought time. 

The rest is piffling – including helping aspiring home owners to get into a bind they would be better advised to avoid, amongst other measures we could similarly criticise as pointless or perverse.

The one thing we have consistently said to our clients from the moment the credit crunch hit is that it should, and probably will be, a long drawn out affair. Whereas companies can shift the make-up of their balance sheets very fast, households cannot – and indeed need to move slowly to avoid beggar-my-neighbour effects on other households. Actions by governments may in these circumstance have important validation effects (‘burden sharing’, for example) but they are relatively powerless to alter the course of market economies when driven by balance sheets. That causes me no concern, but I have more confidence in markets than I do governments.

Our clients, whatever the relative strength of their faith in markets and governments, should be glad that their Defined Outcome Portfolios assume that markets can stay hostile for a long time and that their exposures are tested, against personal time horizons, to survive that. Not to plan on this basis would be irresponsible, obviously.

These payments formed a key focus for the FSA’s RDR commission rules. Extending a commission ban to platforms risked undermining a firm’s business model (many are performing badly financially anyway) but not doing so invited the risk that platforms would allow investors and their agents effectively to avoid the commission ban by making greater use of platforms for that purpose.  Clearly, therefore, platforms were always crucial to the effectiveness of the RDR project.

After consulting for three years with providers, platform managers and agents, the FSA has decided to postpone any decisions about the cash payments between providers and platform, and about rebates from platforms to customers, that are absolutely fundamental to their business models before and after RDR. They have said no decision will be made before other RDR rules changes come into effect, 1^st January 2013.

Considering the potential for a commission ban to leak away to nothing if agents route all business currently earning commissions through a platform (a point made in our recent assessment of the RDR project), and considering that any different treatment of platforms from other forms of distribution would perversely encourage new biases in the marketplace, this is an astonishing admission of failure on the part of the FSA.

The failure is not so much one of indecision now but of strategic naivete and poor analysis at the outset of the role of platforms in modern distribution systems. This is a criticism of the FSA’s handling of the project. Since our earlier paper had made other criticism of process, we thought it was worthy of a press release.

To read the press release click here

In my recent article in Citywire Wealth Manager I explain that the FSA is handicapped by assuming the problem is uncomplicated when it isn’t. It therefore provides guidelines to firms that are likely to lead to inefficient risk choices by both agents and clients. We can only guess at whether this leads discretionary clients to take too much or too little risk and which would do the most harm.

Citywire’s title was Why wealth managers are to blame for suitability crackdown. I blame the industry rather than the FSA not because they are our regulator but because they take their cue from the industry. If we adopt, as standard practice, facile processes for assessing personal risk preferences, assessing portfolio risks and then for ensuring the two match up for each client, the FSA is likely to adopt facile guidelines for each and apply them in a facile way. If this is what the FSA has done, and if it has distorted in any way its shocking findings, and if we want to make sure the FSA does not undermine investors’ confidence (as this exercise may have done), we first have to make sure our processes are fit for purpose. Denial is not without a cost.

Obviously we think we have thought about the problem, we have come up with different ways of defining it and different solutions (heavily quantitative) for dealing with it. As regular followers of our blogs will know, both draw heavily on Liability Driven Investment techniques.

Click here to read the full article.