28 February 2019
The Nanny State
A call for more.
By John Watson
Why is it no surprise? The papers are full of stories of people being persuaded to cash in their pensions by fraudsters who then do them out of the loot. The result: rich fraudsters, poor pensioners and – worse still in the eyes of the politicians – a burden on the state. And all this where proper provision for pensions was made in the first place. What a mess, and like most of the worst messes it was created by politicians looking for easy votes.
Oh yes, Osborne’s bright idea of allowing people to draw from their pension funds sounded politically attractive. “The Tories give you the decision over your own funds.” “Roll back the nanny state.” “Why should you be paying interest to a bank when there is money in your pension scheme?” All fair enough when you are dealing with the financially sophisticated, but unfortunately the same rules apply to the less financially acute as well and it is to them that unscrupulous financial advisers will be addressing their invitations. “Gosh, surely not,” you will say, “they have a duty to advise impartially”. Perhaps a moment to remember those who were advised to sell out their rights under final salary schemes? Not so well advised, were they?
And it isn’t just the less well-off who are exploited. It is the wealthy as well. Older readers will remember the drive to get individuals to become names at Lloyds, the conversations with unscrupulous agents in the lift: “Yes, you will be asked to confirm that you understand about unlimited liability but, don’t worry, that’s just theoretical really. Still, the old farts who run Lloyds insist on your confirming you understand it. Just shows how uncommercial they are…” Kerchunk, another commission is earned. Kersplat, another family is ruined as those “theoretical” liabilities come home to roost.
The fact is that any system which relies on financial advisers to protect naïve people from themselves is doomed to fail. That is not because financial advisers are a particularly unscrupulous crowd. They are not. There are many sensible and excellent ones. The problem is that the foolish and greedy will always be attracted to the sharper operators because they recommend the most attractive sounding opportunities, the ones their more reputable colleagues will not touch, just as populist politicians win votes by offering superficially attractive policies without worrying about whether they are realistic. It doesn’t help that the advisers are independent, either. In a highly competitive industry, fees and commissions are earned by attracting clients. That is enough to bring in the wide boys. They may have no link to a particular investment but they still have an interest in earning fees from clients and if introductions to flashy investments help maximise the fees, why, that is how you build a business.
So, what should we do? Should we come over all lefty and recommend that financial advice of particular sorts be rubber stamped by a statutory regulator – replacing greed by incompetence, as it were? That would have the aesthetic appeal of trimming the ranks of the advisory cowboys but in a remarkably unsatisfactory way. Any official policy would either have to be in favour of retaining money in schemes (though how long before the Treasury began authorising the transfer into approved investments) or would end up with advice being tested against regulatory standards rather than the judgement of the adviser. Either way the Government would be held responsible for what went wrong.
None of that makes sense at all. It is the starting point which needs to be looked at. Pension monies were granted tax privileges because they were held for pensions, death benefits and a restricted lump sum at retirement. The attempt to turn them into a sort of “super-isa” was a foolish error, no doubt partly fuelled by the Treasury’s enthusiasm for accelerated tax receipts. It should be reversed.
But there is a broader issue here. In its dealings with the finances of private individuals, the Government should think about the risk of its measures propelling the foolish and improvident to disaster. With that in mind let’s ask two specific questions. The first is why tax is not automatically deducted from interest payable to individuals. Even bank interest can now be received gross and that means a huge number of individuals receiving cash up front with all the tax on that money being paid later. That hasn’t mattered much in an era of very low interest rates, but a restoration of historic levels would change the game entirely. Surely basic rate income tax should be deducted generally, with repayments made early through the system under which individual taxes are paid by instalment, extended as necessary?
But the more important question relates to universal credit. That system has its problems, God knows, but one of them is the fact that in general payments are made monthly rather than fortnightly or weekly. This is a regime which should be specifically designed for those who have difficulty in managing their affairs. Pay them monthly and you push them into the hands of the payday lenders. Pay them weekly and they may just have to subsist on potatoes for the last day of the week. And if you went further and made the payment after the deduction of rents due to housing associations and local authorities, a whole lot of unnecessary debt would be avoided. Yes, it’s nanny stateism but where the state is already involved it needs to think about how its policies affect its less astute citizens.