Planning to Save

As seen in this month’s Master Investor Magazine

I am not expert in pension and savings planning. But I console myself with the fact that I’ve not yet met anybody who knows anything like sufficient about this subject to persuade me that he is worth listening to either.

However, my eye was caught by an article in the Spectator of 23rd of May 2015 in which the former City editor of the Daily Telegraph, Neil Collins, sets out his views as to how best to save for the long term. He is not a fool. What is really interesting is that he thinks that pension policies are a waste of time and money. I am not sure he’s right about that since the general principle behind these pension policies is that tax relief at 40% can be achieved on entering the fund and gains can be rolled up for the duration of operation of the fund free of tax and, when those savings are drawn upon, only income tax at the then standard rate might apply. If that rate is 20% of the coming out bit as against relief of 40% on the going in, there is obviously a theoretical attraction as the law stands. On top of that there is also a lump sum of the order of 25% of the fund which can be taken completely free of tax when retirement eventually occurs. All this is very long term.

One has to be cautious about claiming to know the law that will apply in 20, 30 or 40 years’ time since politicians, when they run out of money, have no hesitation in making the law less favourable to savers. And in this particular example I think there is a fair chance that that is exactly what the politicians will do.

Neil says that he thinks the administrative costs of pension pots will rise such that there is a serious impairment of the returns achieved on these funds. I have no way of knowing or guessing the extent of such waste but it seems very likely that it will occur – it is bad enough as it is. Where Neil is emphatic is when claiming that an ISA is the better way to save. As I have earlier remarked, I do not see how he can be certain about this since there’s no tax relief going into an ISA and, although the gains are free of tax within the ISA, and there is no tax applied to withdrawals from the ISA my instinct is to bear in mind the possibility that politicians can seek to freeze ISA capital sums at some point. I’m not being cynical.  I am merely reflecting upon the fact that the general level of debt – by that I mean government debt – in this country is so great that the temptation for politicians to do something about it by raiding people’s savings must be overwhelming and increasing.

That noted, I think the politicians will have a go at property first. Think of Miliband’s insane mansion tax. Neil makes a very good point that savings put into ISAs are free of tax on a pretty considerable scale. Certainly, the amount that can be saved without the annual ISA subscription limits being hit is considerably greater than the average man or woman can set aside. Therefore ISAs must be worth looking at.

A big mistake that savers make with ISAs is that stockpickers for ISAs have historically included funds which have hidden charges applied to them – possibly as much as 2% per annum (the famous “trail”). So although the ISA is on the face of it the cheapest form of investment vehicle to consider, the reality is a hidden accumulating cost which impacts performance on a considerable scale. (I know these hidden charges are supposed to have stopped but I do not trust the providers of these funds.)

Also, one should not forget that every taxpayer has the annual tax free capital gains allowance of £11,000 odd.  Truly, an astute taxpayer investor will be hard pressed to pay any tax on really quite substantial savings.