The 50p tax isn't going to greatly enrich the treasury - but private pensions will

Ed Balls's 50p tax is nothing but theatrical politics - pay close attention to the Lifetime Allowance, the cap on pension funds, which has already been lowered and most likely will be again.

“It’s still £98.13 no matter if you have just installed a self-retracting awning sir.”

“But look, look at this picture – four bedrooms, two bathrooms, a recently extended kitchen and planning permission for a loft conversion.”

“It is very nice – would you please take your estate agent's valuation out of my face - but it’s still £98.13 for the groceries, or should I call my Supervisor?”

This is a familiar scene for me and my chosen check-out lady at my local supermarket in Wandsworth. She simply refuses to accept that my house, independently verified by an estate agent, is exchangeable for any amount of goods and services at her retail outlet. No matter how wealthy I tell her I am, she nearly always expects something that looks like ready cash. There is just no pleasing some people.

The distinction between wealth and money should be obvious. Still, it doesn’t stop some people trying to mix the two things up. Ed Ball’s announcement that a Labour administration would reintroduce the 50p tax band has deflected us from the wealth/money problem in a rather pitiful attempt to launch some sort of class war between the haves and the have nots. You can understand the shadow chancellor’s motivation: it is a mathematical certainty that the have nots are always going to be in the majority. The haves wouldn’t be your natural voting group. Besides, they are probably too busy whooping it up in Davos to notice anything you say.

The problem with this kind of theatrics is that although, in the short term, it will have the gallery punching the air in support – a recent YouGov poll shows that 61 per cent of people surveyed support the 50p income tax rate - the passage of time has a terrible way of reclassifying who is defined as wealthy and who is described as poor. For instance, this April a new and little understood change in pensions legislation will come into force, which is subtle but something of a time bomb if you think you aren’t with the haves. Something called a Lifetime Allowance (LTA) is being applied to everyone: the amount that you can have in a pension without penalty is being capped at £1,250,000 – if you have anything in a pension above this limit, when you retire, you will be taxed at up to 55 per cent on the excess.

Now I am sure there are many of you sitting there thinking “Good – make the bankers pay” (it’s always bankers in some people’s minds), while you are also probably thinking that £1,250,000 as a pension fund is outside anything imaginable for most people. And it is – currently.

Estimates I have seen show that about 30,000 people will be captured by it immediately, but that’s still only enough to fill Fulham Football Club’s ground to overflowing. Even with the current limit, about 360,000 people are expected to be captured by the time they retire.

HMRC have a way of calculating what your pension pot equivalent is – they merely multiply your expected pension income by 20. So let’s imagine that you expect to have total pension rights which pay something close to the national average of about £15,000. Well, that would give you a current pension fund size of £300,000 according to HMRC. It’s a big number, but nowhere near the one and a quarter million mark. Now let’s also imagine that we actually start to see pension income rising in line with inflation over the next ten years (as the baby boomers retire). In that case your pension fund will be worth the equivalent of over £400,000. This doesn’t allow for the growth of the underlying investment, so that is a lower limit – it wouldn’t be difficult to show how that number quickly becomes more than £500,000 if you allow for any rise in the value of the underlying investments. If you are lucky enough to have a pension income greater than that and say approaching the present average income then your pension fund could easily look like £900,000, putting you within spitting distance of the current LTA.

History tells us that things like the Lifetime Allowance start off in one place and end up in another – it has already come down from £1,800,000 to £1,250,000. I suspect that, as time progresses and the pensions problem moves from a distant rumble to a deafening roar, that the LTA number will fall to capture a lot more people than the capacity of Craven Cottage. In fact, one day, I doubt you’d be able to get them all in to the total capacity of the Premier League of a Saturday. In other words, a lot of people are about to be reclassified as Haves, and without knowing it, they will have become The New Wealthy Poor – those who have no money but are assessed to be wealthy and to add insult to injury may even have a large tax liability on retirement.

Let’s face it, the money for our pension promises and the care of the elderly is going to have to come from somewhere (we can’t just dump it all on the next generation) and, as we have seen, general taxation and silly gimmicks like Balls's 50p higher tax rates do not transform our public finances no matter what the opinion polls show. The one area that is ripe for raiding is the private wealth of the general public (not just the wealthy elite) and the reduction of the Lifetime Allowance is just the opening salvo in a long and stealthy war to get at it.

Ed Balls speaking to the Confederation of British Industry. Photograph: Getty Images.

Head of Fixed Income and Macro, Old Mutual Global Investors

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Europe: as the politics subside

How long can a resurgence of investor interest in Europe last?

Might Europe be the place to be?

I think European equities tick a lot of the right boxes right now. Economies are recovering – indeed the first quarter of 2017 saw Europe once more grow faster than the US, having outpaced the world’s largest economy in 2016. Valuations are not excessive, either relative to the region’s history or the US equity market. Like almost anything, I believe European equities also look compelling relative to bonds. The final part of the jigsaw puzzle might have been earnings growth, but here too Europe is, at last, getting close to achieving a gold star.

Most of this has been known for quite a few months now and is part of the explanation for the better performance of Europe year to date. Even the euro has strengthened against the US dollar, from about $1.05 at the start of 2017 to $1.12 at the time of writing. Politics looks more settled, after the surprises of the Brexit vote last year in the UK and the election of Donald Trump in the US Presidential election. Perhaps a comment I made at the beginning of 2017, that “by the end of 2017 the UK and the US might look to have been the exceptions” when it comes to successful populist votes, seems more prescient.

Now that the political backdrop is perhaps more settled, with the UK’s potentially tragic Brexit decision an exception, how long can a resurgence of interest in Europe last? One threat is the gradual move towards ‘tapering’ by the European Central Bank (ECB) of its unprecedented quantitative easing program, and the support this provides economies by injecting cash to drive down the cost of borrowing and increase consumer and business spending. But it is already clear that this will be a very slow process. The economic recovery in Europe remains quite slow and inflation, outside the UK, is well below the ECB’s target of ‘below or close to’ 2%. At the same time, the damaging effect of negative interest rates needs to be avoided.

 

What could derail this market?

The one exception to what looks to be a relatively rosy scenario, in my view, remains the UK. The Brexit ball is rolling onwards, following the invocation of the now infamous Article 50, but the calling of a General Election was another distraction. The UK is still no closer to knowing what sort of Brexit is desirable, or more likely, economically feasible. Once the reality of debt, demographics and a weak currency become clear, I suspect that the UK market will continue to struggle against other European peers.

Elsewhere in Europe, economies look well set, and I suspect that more capital spending and investment are likely to be incentivised with tax cuts in Europe, again outside the UK. In this scenario, those capital investment-related names such as Siemens, Legrand and Atlas Copco should continue to do well. Luxury names, and auto makers, many of which have rallied hard so far in 2017, are likely to struggle due to subdued consumer demand. Financials have also seen mixed performance so far, with insurance underperforming banks. This seems an anomaly given the paramount importance of long-term savings to cater for retirement.

It would be entirely healthy for European markets to drift through what will hopefully be a quiet summer, without shocks such as Brexit to contend with. I think all seems well set though for European markets to trade higher than current levels by the end of 2017.

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