Where did I go wrong?

I am posting this week details of a conversation between one of my sons and myself. While the conversation never took place exactly as I narrate it, the views are ones that my son has made clear to me over some time. I find it alarming that he needs to come to the conclusion he has.

While I believe in free market capitalism largely because the alternatives are dire, there is no question that we have got certain aspects fundamentally wrong. When I hear, as I did from an economist on the Today programme this morning, that the median family income in the UK has not increased in the last 10 years, and the median family income in the US has not increased for the last 30 years, it becomes clear that we have been living in a fool’s paradise.

I do have some ideas as to how the situation might be rectified over time. They are fairly radical, but I am no expert – only taking grim consolation that no one else appears to be either. But I do know that the present alarms provide an opportunity for deep reform. If we lose this opportunity the roundabout will continue to turn. But the next time around I will not hear it from 6 foot deep. Will you?

*    *     *

You could regard this as a personal coda to Well – Fair? of a week or two back. It reflects conversations with one of my sons, who is entering middle age. I had been telling him how important I thought it was for him to build up pension funds for himself and my daughter in law.

He knows that I have savings, so he asked me what rate of interest I was earning. I told him that 3.5% was about the mark. “And then” he said “you have to give nearly half away in tax. And your savings are from taxed income?” I had to agree. Then he reminded me of the rate of inflation.

So my savings are not increasing year by year, they are simply decreasing. I am, in effect, being penalised for daring to have them. I said “I could sell the house, and move into something smaller.” “Yes” he said, and we did a calculation. I realised that the stamp duty price I would be paying for the privilege of downsizing and saving on resources would have provided deposits for house purchase for four of my young, adult, grandchildren.

He went on, “But at least it would free up money to spend. As it is, you realise that nearly half the house’s value is in hock .

“No it’s not. I followed all the pundits’ advice and paid off the mortgage decades ago.”

“That shows you why you should take no notice of pundits. Given inflation, borrowing money is ridiculously cheap right now. But I’m not talking about mortgages. This is called Inheritance Tax; it’s at 40%. And as you were foolish enough to have a large family, whatever you are good enough to leave us will have to be divided between 5 children and 14 grandchildren.

I pleaded that at least I had enough money to live in a care home if I needed to. He agreed with that but pointed out that I might well be in a room next to someone who had never saved a penny. “And you realise that your fees will be bumped up to pay his fees because the councils don’t pay the care home owners the proper price. Who’s got the best bargain there?”

But I was determined to win this one. So I pointed out that I was fortunate in having had a final salary pension, while he had no such thing. “Yes,” he said to me “And I’ve seen what happened. People who retire now will have had their pension pot collapse in value – and their annuities are going to be based on low rates of interest and lengthening life spans. That’s a real reward for savings!”

“Why are you looking so cheerful?” I asked. “Oh, nothing really. It’s just that Jeanine and I are off to the States next week, for Christmas. That’ll be our second trip this year. Thank Heavens the welfare state teaches us to spend rather than save.”

Where did I go wrong?

About Quentin

Portrait © Jacqueline Alma
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22 Responses to Where did I go wrong?

  1. Peter D. Wilson says:

    I’m not at all sure that you did go wrong. You did what seemed right at the time, and given the uncertainties of the world that is the best that any of us can do.

    I don’t know whether you’re familiar with the three laws of thermodynamics, which underlie the whole science and technology of energy. In more general terms, they have been fairly accurately paraphrased (I don’t know by whom) as:
    1. You can’t win.
    2. You can’t break even.
    3. You can’t get out of the game.

    Much the same seems to apply to long-term financial provisions except for those sufficiently well-informed and unscrupulous to gamble successfully on the misfortunes and misjudgements of others. But then, didn’t Jesus advise us to take no thought for tomorrow? I doubt whether he meant it literally, and I have certainly been very careful to maintain what I hope to be adequate provision (supported, like your own, by a final-salary pension that I’m not very confident any government can afford to maintain as things are going), but beyond that I can only hope if not for the best then at least for the tolerably well.

  2. Trident says:

    “I do have some ideas as to how the situation might be rectified over time.” Quentin, please indicate how these ideas go. If you get them wrong, don’t worry. We’ll let you know!

  3. claret says:

    I have no insight into how ‘unexact’ your conversation was with your son but ‘as you tell it’ he was wrong on every point with, I suspect, the one exception of his holiday arrangements !

    • Quentin says:

      Unfortunately, Claret, it’s not much good my telling my son he’s wrong. He tends to ask me for evidence (I can’t imagine where he got that challenging habit from). So do tell me why he is wrong. I have checked — and he seems to me correct on every count. So we both need to be enlightened and await your information.

  4. claret says:

    Here goes , in brief, and without being too specific as I do not know your financial circumstances.
    Firstly your son is quite wrong about taxation on savings. Every person is entitled to earn a certain amount without tax and for a non-earner ( perhaps your wife,) she is entitled to the same amount. So , possibly you can put your savings in your wife’s name ? Same allowance goes for children but this is more complicated and I expect would not apply to you. However both you and your wife are entitiled to tax free ISA’s , one each per annum. So no taxation on ISA generated interest.
    As for inflation , this is a fact of life and applies equally to your son as it does to you, however if you have savings you have a cushion that he does not have. For example you could withdraw your accumulated interest every year to boost your annual income. True this leaves your capital sum to remain at its initial level but your son does not have this cushion and therefore inflation hits him harder than you.
    As for inflation eating a way at your savings this can be minimised by putting your savings in long term savings bonds ( say 4 years,) which will , at least, just about keep up with inflation but obvioulsy access is ‘tied up.’
    As for house purchase: Stamp duty is paid on purchase not on sale. So there is no stamp duty on the house you are selling so if you wanted to you could consider selling and then renting, or moving abroad. Not particularly advisable for most people but perhps worth thinking about. Assuming your son is not a house owner then he has no flexibility at all.
    There are also other schemes that as a house owner you could ‘tap into’ if times necessitated it. (Especially as you own your house outright.)Your son could not.
    Care home fees: There are ways to protect yourself from the worst scenarios but you would need legal advice beyond what I can give here but there are legal ‘ways and means.’
    Lastly ask your son if he and his wife were retiring today and reliant solely on the state pension how they would expect to live comfortably, meet all their bills, and still have holidays in America on £200 a week joint income, and no savings !

    • Quentin says:

      Claret, that’s very good of you to take the trouble to comment more fully on the dialogue. But, you know, I still have some problems.

      I started saving under the impression that I could in fact boost my income from the rate of interest, but I find that I cannot even earn enough to cope with inflation. Of course, an Isa is tax free – but the best rate I can find today is 3.05 at a time when inflation is running at 5.5. If I go for a fixed term bond, say for 3 years, I can net 2.6, just about half the inflation rate. If I do it via my wife I get 3.44 – still one per cent under inflation. So my son seems to be right here. Would you like to forecast when I will get a worthwhile, or indeed any, return over inflation?

      I know that the stamp duty on my house is down to the buyer, but that cost will be reflected in the price the buyer is willing to pay. And of course I will have to meet, no doubt a smaller sum, as well when I repurchase. When the Revenue scuttles off with it ill-gotten stamp duty gains, it’s real money it has stuffed into its pockets.

      I have no doubt that I could fund care home fees (and my wife’s care home fees too – perhaps £100,000 a year for both of us if we’re not too choosy. A neighbour of mine is paying £65,000 a year for her father – and has done so for 7 years now) by re-mortgaging, but the issue is that when I pay extra to cover my neighbour’s shortfall, in effect it is yet another tax I have to meet.

      My son doesn’t feel that he has a particular problem – after all he can re-mortgage too – and there might even be a dribble left from my reasonably successful lifetime of hard work and thrift.

      I do of course agree that I am happier having resources than not. And I feel a great deal sorrier for the coming generations. I am only sorry that our present system allows me to help my children and grandchildren much less than I would have liked.

  5. claret says:

    I omitted to point out that your son is also wrong when he says: ” borrowing is ridiculously cheap right now.” The only borrowing that has become cheaper is mortages and that is mainly of benefit to those who already have one. Set up fees for new buyers or those changing providers can be quite expensive and are not shown in the ‘percentages’ and even the low rates are generally short term.
    All other types of borrowing are no cheaper now than they have been for many years and this despite record lows for the Bank of England rate. Try looking at credit card rates after the early three month rate has passed. It is not unusual to see interestr rates at 20 % and more.
    Bank loans are still running at around 10 % and one short term loan rate is advertised on TV at around 2250% !!
    A reality check is needed.

  6. claret says:

    You have to be clear that you are not being taxed on your savings. What you are taxed on is the interest that those savings generate. If you add the word ‘only’ as ‘only taxed on the interest and not the capital amount’ it perhaps does not sound so unpalatable.
    You then have to factor in the ‘risk’ element. By putting your savings in low interest accounts you know that your capital sum is safe. It is risk free. The price for this certainty is the low interest rates.
    In answer to your query as to how to beat inflation then you can put your savings into many accounts on the open market that will easily beat the rate of inflation but as the warning goes:’ Investments can go down as well as up and you could end up with less than you originally invested.” The trick here is knowing when to pullout ! But in essence these are ( or can be,) savings that will beat inflation. It all depends on your attitude to risk.
    It sounds as though your wife does not have paid employment and this means that she can have an ‘interest’ generated income up to about £8000 free of all tax. Any additional tax will be subject to the normal tax levels so even if you generate a taxable income from interest in her accounts the next level is 10%. If she ends up paying tax at an higher rate than that then you have enough income to last you to your demise providing you live reasonably !
    Your son is leaving himself and his family to the fates of the future. It is by no means certain that 20 or 30 years from now the benefits system will be as generous as it is now. Indeed the best guess is that it will not be so as it is plainly unaffordable even today.
    Care homes might be only for those that can afford them from a private income.
    Your son is gambling without a full pack of cards. You are not.
    Incidentally are you aware that if you let out a room in your house , rather than sell it, you pay no tax at all on the first £3000 of income that the ‘letting’ generates? Perhaps a better option than moving to something smaller .

    • Quentin says:

      Well yes, and then again perhaps no. There was a time when one was rewarded by interest for deferring expenditure. Today the future buying value of saving is less than it was when the saving was made. This is why it is right to describe it as “penalised”.

      I would be glad to know further about this 10% rate of tax on my wife’s income. Rather obstinately my tax inspector insists that the bottom rate of tax is 20%.

      While I accept that it is true that risk investments can provide a better return than inflation, I seem to recall that not long ago the FTSE 100 was comfortably over 6000. Today, even though it has received a considerable boost in just the last week, it is substantially lower than that. And the pundits are warning dolefully of potential disasters ahead. Would you recommend such investments to a couple in their late ’70s?

  7. Quentin says:

    Thank you very much, Trident. I had a feeling that it might be a mistake to suggest that I had any ideas. Bet here goes – in a very rough and ready fashion.
    1. The overarching principle is that we must become an elite society in which achievement is highly valued by good rewards and prestige.
    2. The “deserving” poor, and particularly families and the old, must nevertheless have their basic needs met.
    3. The able unemployed must be set to work, if necessary through simple manual labour. There must be no “advantage” in being on the dole.
    4. No fiscal or similar decision will be made on the grounds of envy. For example the current 50% tax rate yields no additional revenue, and merely persuades contributing citizens to take their affairs overseas; it exists only to please those who dislike others being more successful than they.
    5. The educational system must include a strong focus on how we support high performers; we must not be satisfied with high average performance alone.
    6. We should expect no more than a quarter of school leavers to go to university; university entrance and public examination standards should be tailored to this.
    7. There should be a range of hard headed courses in vocational and business subjects.
    Note: Civitas reports (5 December) that the number of British engineering students today is 6000 less than 10 years ago. However the drop has been more than made up by overseas students – who will export their skills in due course.
    8. The cost of these courses should be met through the higher amount (not rate) of taxation on the higher expected earned incomes of graduates in either field.
    9. Expenditure and benefits introduced by the government should be transparently costed and vetted by an expert, independent, body – and the consequences publicised. There should be no hidden fiddles like the system of Private Financial Initiatives without the present and future costs and consequences being spelt out.
    10. I should be made dictator for suggesting these ideas, and be very highly paid (free from tax) so that I am fully free to do good.

  8. claret says:

    A slip of the pen so to speak. Twenty per cent so it is. My point being that the higher rate tax figures should not be too worrying because if you are subject to them then you have quite a generous income and should not concern yourself at 70 years of age with the taxation rate eating away at the interest you receive.
    Incidentally if you had invested in the FTSE when it fell to about 3400 ( from memory) about three years ago and had pulled out when it regained to 6000 about a year or so ago you would have made a lot of money in just two years.
    We can play around with figures forever but I think we have got to the stage where we are arguing for arguings sake.
    If you son’s points are so convincing then try joining him in his financial circumstances by giving your savings plus interest to the poor, (as the rich man in the gospel was told to do,) and just rely solely on the state pension. (One last piece of advice should you do what I suggest—don’t book a holiday in the USA.)

  9. claret says:

    Right wing policies as proposed above by Quentin have their own flaws too.

  10. Iona says:

    It doesn’t bear thinking about.
    So, basically, I don’t think about it. As long as my bank statements indicate that I’m still in the black, I breathe a sigh of relief and carry on.

    Quentin, I agree about the number of students going to University (in fact, I’d reduce it to considerably less than a quarter), and about providing work for the “able unemployed”.

    What will you do about the undeserving poor? And how will you decide which are deserving and which undeserving?

  11. mike Horsnall says:

    I am so relieved that persons exist other than myself whose grasp of fiscal policy is slight! As to the deserving poor its quite obvious-those who cannot recite the penny catechism we shoot, plain or what?

  12. claret says:

    What will you do about the undeserving poor? And how will you decide which are deserving and which undeserving?
    And do we really need to succumb to blackmail so as to keep taxes down for those best able to pay them ?

    • Quentin says:

      Since are talking about relativism, perhaps I need to explain my perspective. Taxation is the removal of money which has been earned. For this removal not to be arbitrary confiscation, there must be adequate reason.

      Imposing tax to equalise incomes is wrong. We cannot justify taking what someone has earned in order to console others who have failed to earn as much.

      We can justify taxation which is truly needed to preserve the state, and to care for the truly poor, but we can do no more than that. Necessarily the higher the earnings the higher the contribution.

      How do we set the highest rate? The limit is where the application of a higher rate in practice brings no more revenue. It is generally agreed that 40% is about the highest rate before avoidance or evasion reduces the net take. This is why the 50% rate is not justified, and becomes confiscation through envy. It is a breach of the 5th commandment.

      • Peter D. Wilson says:

        Quentin, I agree. Envy is a far more destructive vice than simple avarice, which by comparison is almost innocent, and arousing it by either incitement or example must also be considered a serious fault. Unfortunately it seems to have become the driving force in much of our economy, and I don’t see what can be done about it.

        I also agree that depriving the rich of what they have earned in the name of egalitarianism is also wrong. However, behind much of the anger over vast rewards to bankers etc. is the belief that they have not been truly earned – that they are out of all proportion to the time, effort, personal ability and past study invested in acquiring them (although how these might be justly evaluated in material terms is also a baffling problem). In at least some instances they are clearly disproportionate to the benefit their operations have brought to their organisations.

        Again, much of the business involved, even where strictly legal, is highly questionable in moral terms. We are back to the issue of right conduct being more than merely obeying rules, but failure to impart that concept is perhaps the greatest dereliction of duty on the part of some educators. Again, without an acknowledgement of higher than human authority, I don’t see what can be done about it. Has anyone any positive suggestions?

  13. claret says:

    It is a well practiced principle that the more money you have then the more tax you should pay. The 50% tax rate for the high earners is a quibble and to equate it with breaking the 5 th commandment is errant nonsense.
    It follows that high earners have more access to accountants and pay them well because they are expert in the skills of tax avoidance that makes them a very profitable economical investment. To suggest that high earners on 50 % tax simply ‘grin and bear it’ is unreal.
    To remind ourselves that one of the highly paid bankers said quite recently that his office cleaner paid more in tax than he did. It would not be literally true but the essence of what he was saying was certainly so.

    • Quentin says:

      You’re quite right. I forgot my commandment numbers; I should have said the 7th — which forbids unjustly taking the goods on one’s neighbour. Which is precisely what happens when the state confiscates someone’s earning for reasons concerned with envy rather than the essential benefits of society.

      As you point out, the wealthy have good accountants. But a number of people are unable for a variety of reasons to avoid paying tax at 50% — accountants or not. indeed in past times I have paid tax at that rate and higher. Since I was employed in this country I had no means of avoiding it.

      You mention the highly paid bankers. But the problem is not that they are highly paid — Bill Gates was highly paid because he was highly successful — but because they were protected from their bad investments by the fact that their banks could not be allowed to fail. There are ways of changing that, but not through taxation.

  14. claret says:

    I rather suspect that Bill Gates paid himself from his own business as opposed to being paid by someone else.
    Of course 50% tax may have to be paid but not on all the applicable taxable earnings. Any reasonably skilled accountant will ensure that is the case.
    Remember the MP’s expenses scandal and of how this was even further disgraced by some of them employing accountants to deal with their expense claims and then submitting the accountant’s bill as yet another ‘expense’ for the tax payer to pick up. (One of those MP’s currently holds high office in the coalition Govt. in the treasury. Evidently that MP cannot manage an own expenses account without the help of an accountant but yet is supposedly suitably qualified to manage the billions of pounds of the nations finances!)

  15. Brian Hamill says:

    I am a latecomer to this discussion though I have been thinking about it off and on these last few weeks. First, may I quote my father, who worked as a cashier in a bank all his life and had a real firsthand understanding of ordinary people’s lives and finances. He said, ‘You don’t make the poor rich by making the rich poor’. Secondly, what the discussion so far has shown is that it is very, very difficult for anyone, unless highly trained in the financial sphere, to navigate a way through the minefield of all the possibilities and pitfalls towards achieving financial security. We need to trust people to show us the way; unfortunately some whom we should have been able to trust have betrayed that trust, and they were almost all bankers.
    The key thing wrong with our banking system is that the banks serve two masters: those who deposit their money and the shareholders.The former ‘master’ is more a moral responsibility than a legal one; the latter is the truly legal one. Banks, unless privately owned, are obliged to maximise their profits by law. This means that a bank which seeks to protect its customers by real prudence rather than taking all the chances available can be called to account by the shareholders. So when that guy in Barclays (?) said that the investment portfolios were overstretched, if the management had accepted his evaluation and pulled back while the other banks leaped forward into the breach and made even more money, it is quite possible that the shareholders would have called Barclays to account since their dividend would have been reduced. The fact that two or three years down the line the management would have been proved correct in its decision may well not have saved them from the wrath, perhaps even legal wrath, of the shareholders at the time.
    A last point, Quentin, on the alleged stance of your son: in life one does what one can to relieve the plight of the poor and enfeebled, and that in the long run is you and me and everybody. If God has given me the talents to build up a pot of money whereby I will be less of a financial burden to my family and my extended family (the State) in my old age, then I have a moral obligation to do what I can. Many do not have that opportunity owing to the hand that life has dealt them. The key to true peace and joy is never to compare my lot with others. I will not be judged on what anybody else has done but on what I have done, or failed to do.

    • Quentin says:

      Brian, thank you for your interesting points — much to think about here. One of the issues is with the nature of capitalism. Although you cite the tension between safety and shareholders in banks as an aggravated case, there is inherently a tension between shareholders and customers throughout the system. Perhaps a representative issue is the formation of the limited company. Here, a legal entity was created in such a way that the company could go bankrupt without affecting the fortunes of its owners (except to the extent of their shareholding). That of course is an invitation to take risks because personal liability is restricted. Yet, without the protection of the limited company many, now successful, businesses would naver have started. And we should all be the poorer. So what lines have to be drawn? I say, as few as may be absolutely necessary.

      With regard to sharing one’s good with others, I saw a programme recently in which a multi billionare confirmed that, at his level, the size of his tax bill was voluntary. But, in the other hand, he had set up his own web of charitable companies. When asked why, he claimed that so much public money was badly spent (often just for political advantage) that he wanted to choose the destination of his gifts. Can’t say I blame him.

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