The Wiki Man

ISA and pension limits discourage ordinary people from saving

17 March 2018

9:00 AM

17 March 2018

9:00 AM

The maximum amount you can save in an ISA for the tax year 2017-2018 is now £20,000. The maximum annual pension contribution is £40,000. Counterintuitively, these huge allowances are actually a disincentive for ordinary people to save. With a £5,000 ISA maximum, a modest saver had an impetus to save each year for fear of missing out; with an ISA ceiling of £20,000, anyone can postpone saving until next year.

But you don’t have to be a Marxist to wonder why a household which can save £60,000-120,000 a year is in need of extra help from the state. Figures released this year by HM Revenue & Customs forecast that tax relief on pensions will cost £24.1 billion, with a further £16.9 billion spent on exemptions for employers’ contributions. Some of this is a worthwhile incentive for people who might otherwise not save; the great majority is a redistribution of wealth in the wrong direction: a subsidy to people who would save money without encouragement.

There are two classes of people who should be righteously angry about this. The working poor, who get very little benefit from an incentive which should be directed to them, and the extravagant rich, who as a group seem to be the world’s least effective lobbying organisation; without the tax breaks for rich savers, their tax rate could fall appreciably.

These two groups are, after all, the people who keep the whole capitalist show on the road. The working poor are inarguably useful for their work: if you see someone performing a poorly paid job, you can be confident that they are doing something worthwhile — people don’t build walls or collect rubbish for fun. The spendthrift rich are valuable for their consumption: when a new café opens, when you can buy 17 different varieties of tomatoes, when you can choose between 11 daily flights to Ibiza… well, you have the extravagant rich to thank for that. Almost all technological advances are first supported by the spendthrift rich — cars, electric light, plumbing, home-computing, washing machines, television, Teslas. In return for this generosity, the government rewards them with a tax rate of 40 per cent+ and a VAT rate of 20 per cent, while gloating savers get tax breaks on economically useless assets like property.

There is no hope for a sensible discussion on inequality until we properly distinguish between wealth and income. Today, a young family whose earnings lie just within the top 10 per cent of household income (£60,000-ish) would need to spend nothing — and pay no tax — for almost 20 years to amass wealth of £1.1 million — thereby reaching the top 10 per cent of households by wealth. The idea that you can reduce wealth inequality by taxing income no longer makes sense.

Moreover countries with seemingly admirable income equality are often very unequal in terms of wealth. Don’t believe me? Well, on a ranking of reasonably developed countries, the United States has a very high level of wealth inequality — it’s in second place. Turkey comes fourth. So far no surprises. But who comes top? Anyone wanting to win a pub bet should memorise this, since it’s not something anyone would guess. It’s Denmark. Yep, Denmark. And who comes third? Sweden. Norway and Germany are both worse than the UK. Denmark may look like an egalitarian paradise full of fresh-faced Nords on silly bicycles, but it has the wealth distribution of Game of Thrones.

The problem with quantitative easing is that all the extra wealth went to people with the lowest propensity to spend it. Next time round they should either give the money to the poor, or hand it straight to Elton John and Snoop Dogg. Either way it might actually enter the useful economy.

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