Every country shares a problem with pensions, which is simply how to ensure that they are provided at the required levels. Whether that’s a state pension or a social contract that makes people understand that they’re on their own, each government needs to find a way to keep a large majority of its populace fed and housed sufficiently in their retirement that they won’t cause problems (and, we hope, with more altruistic motives than that).

It’s interesting, then, that the US and UK have decided upon different solutions to this problem (primarily individual based in the US, state based in the UK), yet have both run in to similar operational issues. Both countries have decided that the best way to encourage retirement saving is to have lots of options, be they employer-based schemes, self employed pension plans, 401k plans, IRAs, personal pensions, stakeholder pensions, and the list goes on. Admittedly I’m an oddity, having lived in 2 countries, but right now my wife and I have 10 pension plans between us, not including any government provision. And that’s not because we’ve been working the system; almost all of this has come about because of job moves.

I understand why all these things have developed (politics is a game, and a handy way of winning the game is to introduce new cards), but in the mess of options the point of such plans has been missed. That point isn’t for people to have a pension plan, it’s for them to have savings. To do that I need a place to put my money – let’s call that a ‘pension plan’. I need to be able to pay money into my plan, I need surety that it will be safe (not a guarantee of return, necessarily, but a promise that I won’t suffer due to the managing company’s bankruptcy, for example), and I need transparency around the fund’s balance and performance.

And that’s it. I’d like favourable tax treatment, and contributions from my employer, and low fees, and a bunch of other things. I’d accept limits on how much I can withdraw, and when, and some element of compulsion. But none of these things are necessary. What I don’t need at any point is more than one plan.

Update: Forgot to mention that this was sparked by this article on the flaws in 401k legislation.

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Here’s an interesting twist on the sub-prime mortgage scandal (TM) in the US. Back in the day you would take a mortgage out with a lender, and they would hold that lien on your home until you paid off the mortgage. But as mortgages were turned into commodities they were sold off to institutions all over the world. That in itself would be a minor complication. The problem comes when you bundle together many loans, and then sell a share of that bundle to several different buyers.

Financially that’s fine, until it comes time to foreclose on the house. To get your money back on a property you have to show your ownership of the mortgage for that property. And if you bought a fraction of the commodity as a security then you don’t have full ownership, and in all likelihood neither do you have a piece of paper (technically required) to show your ownership.

This could be good news, surprisingly; up to now only real people have been suffering, while banks write off theoretical profits. But now the banks are at risk of losing actual money, and that requires action.

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Stamp Duty

Following on from yesterday, the second proposed change from the Tories is to stamp duty, the tax paid when a house is bought. Stamp duty is perhaps the worst tax in the UK, for three reasons. First, it affects people trying to put a roof over their heads, which is something the government should be encouraging, not discouraging. Second, it kicks in at just £120,000, which with a bit of hunting might just get me a house that would be too small for me to legally occupy with my family, so I can’t realistically choose not to pay it without forgoing a home. And finally, it’s hideously regressive (I think that’s the right term, the hideous bit is certainly correct). A house costing £249,999 would pay £2,499, while just one pound more would take you into the next bracket, resulting in a bill of £7,500. Until I found this out I couldn’t understand why our house hunting turned up lots of houses up to £250,000, but then there was a gap until around £270,000.

The Conservative plan is basically to remove the first band (£120k-£250k) for first-time buyers. The reasoning, I guess, is to help people get on to the property ladder, which is a big deal over here (the average wage earner in the South can’t afford a mortgage large enough to buy a house). The actual effect is to keep house prices higher than they should be (rather than letting the unaffordability of houses remove buyers, thereby forcing prices down), without dealing with any of the shortcomings of the tax that I mentioned above.

My preference would be to remove all tax up to the national average house price, levy 10% on any value above that up to 5x the national average, and 20% above that. That deals with the issues, shouldn’t lose much revenue, and discourages the growth in McMansions which the country is too small to easily sustain.

Inheritance Tax

The Conservatives have announced a couple of tax ideas in the run-up to the expected general election. First is a rise in the limit for inheritance tax, from the current £300,000 to an even million. Apart from the slightly grandstanding figure (picked not by economic calculation, but because it lets them say that only millionaires will be taxed) it’s a sound policy. I think inheritance tax has a role to play in preventing the establishment and support of a new landed gentry, but that means it should only affect amounts that would lead to such a thing; for that reason I would support an even higher limit, but what’s a million between friends?

As an aside, it’s inheritance tax, not death tax. If I died tomorrow (don’t all rush to cry “please no!”) I wouldn’t be taxed, and neither would my family. Only if there is a significant inheritance would a tax be levied, hence inheritance tax.

Tomorrow: Stamp Duty.