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  • Private Wealth & Treasury Taxation: Two Sides of the Same Coin

    2 February 2018

    A Fresh Portrait of Private Wealth & Treasury Taxation

    Such is the speed with which world events take place that it seems hard to believe that the last recession began 10 years ago.

    However, it is true to say that despite all that’s happened since, the deepest and longest period of economic turmoil since the Second World War has left a lasting mark on markets, manufacturing and bank balances.

    For all that, the headline figures from the Office of National Statistics’ (ONS) latest figures on household wealth in Britain, might suggest the fog of financial malaise is has lifted.

    The results of the fifth ‘Wealth and Assets Survey’ provide a snapshot of how the country performed during the two-year period stretching from the summer of 2014 to 2016. As such, this is the first instalment since the UK emerged from the tail end of the downturn but does not of course provide insight into what has happened since.

    On the face of it, the statistics paint a decidedly rose picture showing that total net wealth of all households in Great Britain stood at some £12.8 trillion, an increase of 15 per cent on the two-year period to June 2014.

    Perhaps unsurprisingly, London and the South East dominate the regional split – making up more than one-third of the national total – although the North West doesn’t fare too badly in the rankings, far outstripping the Midlands, Wales and the North East.

    Even so, one doesn’t have to look too far or too hard to find a discordant strand of information which puts these rosy headline figures into a fuller context.

    I’m not only referring to the fact that the ONS figures show that the richest 10 per cent of the country’s households have amassed more wealth than the poorest half of the population put together.

    What particularly leaps out when flicking through the ONS’ data is the dominance of pension savings and property values in the nation’s wealth.

    Most striking is the rise in aggregate pension wealth from £4.4 trillion to £5.5 trillion over this two-year period.   The statistics show that between 2014 and 2016, there was a five per cent increase in the number of adults of working age contributing to a private pension. Furthermore, by 2016 two-thirds of employees had private pensions, though the figures for the self-employed remained stubbornly low with one-quarter having private pensions.

    So far, so positive. However, glimpse beneath that 20 per cent rise in Britons’ pension wealth and another picture begins to emerge.

    While it is the case that overall pension wealth has soared, the statistics show that employees have median accumulated pensions wealth of only of £33,000, while the self-employed fare worse with £21,000.

    As for the reason for the growth, among other factors, the ONS has flagged the responsibility placed on company bosses by the Pensions Act 2008 to enrol staff in an occupational pension plan. The process of introducing automatic enrolment was an incremental one, beginning in October 2012 for the largest firms, followed by medium, then small companies and all new employers from October 2017 having an immediate duty to enrol their employees.

    As the changes are recent, so the sums saved in such a fashion are modest, at least for now, and go some way to explaining the increase in the number of employees with pensions but with modest wealth.

    That initiative was part of a laudable attempt to encourage people to look after their financial future but the paltry savings of both the employed and self-employed shows that there is much more to be done.

    Moreover, as a wider concern, I would suggest that Whitehall could be accused of sending out mixed messages. Providing for our own retirement is a good thing but as we’re trying to do so, the Treasury has been active in not permitting pension savings to grow unchecked, regularly fiddling with the pensions rules over the last decade and removing many of the tax-advantages associated with pensions savings, particularly for higher earners.

    In December 2015, the Government announced the latest reduction in the maximum size of the pension pots which we can develop over the course of our working lives. By last year, that limit had been clawed back to £1 million with punitive tax charges for those fortunate enough to exceed that sum.

    If that was not enough, ministers first reduced the maximum annual contributions from £50,000 to £40,000 and then to as little as £10,000 for the best-off. Again, above that mark, there is the loss of what can be very valuable tax relief. While it is appreciated that providing tax relief on pensions has a cost to the Treasury, and is therefore a tempting source of cost savings for any Chancellor, it certainly sends a mixed message when on the one hand people are being encouraged to save but then are being told not to save too much.

    Add to that the taxes (Capital Gains Tax and Stamp Duty) linked to that other great factor in Britain’s growing wealth – property. The ONS statistics show a record 17 per cent growth in aggregate net property wealth, largely driven by increases of median net property wealth in London of around a third between 2014 and 2016.

    Regular readers of this ‘blog will note how often they have featured in our commentaries and the large sums for the economy. For instance, Stamp Duty generated more than £2.5 billion in the final three months of 2017 alone.

    More than concerns about the immediate and ongoing tax receipts which pensions and property might raise, there is the spectre of Inheritance Tax which, in an age of rising house prices nationwide, leaves many wondering if their estates will nudge above the Nil Rate Band, notwithstanding it will shortly rise to an effective £1 million for married couples and civil partners.

    Just this week, the Chancellor of the Exchequer, Philip Hammond, announced a review of IHT. It’s worth pointing out, though, that despite hopes by those most likely to be impacted for further relief, it’s worth noting that “review” or acceptance of a need for “simplification” does not necessarily mean a reduction.

    Reading the ONS figures give fresh thought to financial planning, whether the need to save more, or for those already holding pensions and property, how that wealth might be looked upon by HMRC.

    If you have any queries regarding estate planning, asset protection, pension schemes or inheritance tax, please do not hesitate to get in touch with one of our chartered tax specialists.