Measurement Drives Behaviour

 It's clear the current Labour government have absolutely no idea about consequences of actions.

One of the few rules of life I have learnt is that "Measurement drives behaviour".

Taxation is MEASUREMENT.

People are not stupid like politicians think and if you measure them in some new way their behaviour will change.  Pure Schrodinger's cat stuff. This is the foundation of ecomonics which is a social science.

So Rachel quietly changed the rules on pensions last Autumn. Pension pots were subject to taxation before but at the marginal rate of the beneficiary but were outside of the scope of inheritance tax. The government was getting their tax anyway - just in the future.

From 6th April 2027 pension pots will be part of your estate and therefore subject to inheritance tax and beneficiary taxation.

This has lead to some crazy consequences.

If you died 1 day before your 75th birthday and you had assets of £0.5M eg a house and your pension on top of these assets - let's say £0.5M of pension then the pension will be subject to inheritance tax of 40% so £200k in tax. So overall tax of 40%.

If you were fortunate enough to live 1 day past your 75th birthday and then died and you left your estate to your son who earnt £101k (ie a 45% tax payer), your son would pay 40% inheritance tax and a further 45% tax on the pension ie 85% on a £0.5M pension pot. 

So Rachel is saying £425k for me and £75k for you. Be satisfied with that or I'll take the rest. A whopping 85% tax !!!

What a difference a day makes. 

Now what's the consequence?

Pensioners are racing to withdraw money from their pension pots to avoid the inheritance tax raid.

In the first quarter of 2025 an additional £5 BILLION has been withdrawn from pension pots.

13% of active pensioners who are drawing down have increased their taxable withdrawal - for example increased the drawdown from say £20k per year to £35k per year to withdraw a further £15k at 20% now.

So far in 2025,  672,000 more people than 2024 have exercised their withdrawal of the 25% tax free lump sum - presumably in anticipation of this been taxed.  If the tax free lump sum is left in the pot at death this is taxed as above and is no longer tax free.

For those aged over 80 there has been an 80% jump in withdrawals.

So basically pensioners are moving money out of reach of Rachel's greedy mits.

Awareness of the impact of these changes is only just starting to bubble to the surface so expect the withdrawals to increase to a torrent.

Similarly it's pretty common for business owners to hold the building their business uses in a pension and the business then rents the building from the pension fund.  The rules on this are changing - the pension fund will be liable for the inheritance tax on the death of an owner of the pension fund - not the beneficiary. This means the pension fund may need to liquidate the asset (ie sell the property) to pay the tax potentially causing the business to collapse. If there are multiple business owners who are members of the pension fund, they are all affected, despite being very much alive and not dead.

Whenever governments interfere in markets they either cause bubbles or chaos from unintended consequences.....

Introduce inheritance tax on global assets for non domiciled residents - guess what they leave the country. Hence we are seeing 1,000 millionaires leaving the country every week along with the huge tax that they used to pay.

Raise employer national insurance and introduce a massive minimum wage hike raising the cost of someone on minimum wage by 23% in one go - just like Rachel has done. Well there will be consequences.  Either businesses raise their prices causing inflation.  Businesses scale back on staff - causing rising unemployment. Business hold back on investment and growth - causing GDP to falter. All three of these things have happened.  What a surprise !

Unemployment has risen from 4.4% at the beginning of the year to 4.7% (that's 178,000 more unemployed people). 84,000 jobs have been lost in the hospitality sector ie pubs and restaurants.

Inflation has risen to 3.6% and services sector inflation has risen to 4.7%. Yet growth is negative.   We are in stagflation territory - high inflation but no growth. This has left the bank of England in a dilemma.  Inflation is high so they should be raising interest rates yet the economy is pretty much in recession so they should be lowering interest rates to soften the blow.  Although there's not a direct link to gilt interest rates and the BoE rates, if interest rates rise then gilts tend to rise and similarly in the opposite direction.  The BoE will doubtless be under pressure from the government to lower interest rates as the huge £2.7 TRILLION debt pile is costing more to service.

The story goes on....

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Well the Bank of England has decided to lower interest rates by 0.25% despite high and persistent inflation.  It's clear they think the economy is in dire shape with rising inflation, rising unemployment and rising costs to service the colossal government debt.

The minutes said

"There has been substantial disinflation over the past two and a half years, following previous external shocks, supported by the restrictive stance of monetary policy. That progress has allowed for reductions in Bank Rate over the past year. The Committee remains focused on squeezing out any existing or emerging persistent inflationary pressures, to return inflation sustainably to its 2% target in the medium term."

"Underlying UK GDP growth has remained subdued, consistent with a continued, gradual loosening in the labour market. A margin of slack is judged to have emerged in the economy. Downside domestic and geopolitical risks around economic activity remain"

"CPI inflation was expected to rise a little further, to just over 3¾% in 2025 Q3, before falling back towards the 2% target" - so inflation is going to get worse yet there's no explanation why they magically think it will fall back to 2%.  Who knows what pain awaits us in Rachel's Autumn budget.

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Although the reduction in interest rates is positive for consumers with debt, it hasnt benefited Rachel.  The price of gilts rose (the rate-sensitive 2-year yield was up 5 basis points at 3.88%. The benchmark 10-year yield rose more than 6 basis points at 4.597%, and was last at 4.57%.) so the cost of UK borrowing has therefore risen.  Bad news for cash strapped Rachel. The pound gained against the Dollar making our exports more expensive (do we actually export anything to the USA?).  

It was a double whammy for poor Rachel.  The August BoE MPC meeting also sets some key numbers for the year ahead for her. The BoE forecast that inflation will rise further this year. That means this feeds into government future spending eg pay reviews. Yet more spending (and debt) lies ahead.