Most of us are familiar with the irritation of discovering how much tax we have to pay when we book a flight with a low cost airline. The annoyance is temporary though and, in the end, does not impact the decision making process. We know that if we fly on a full service airline we still have to pay it. The only reason that we know about the tax is that the actual cost of the airline ticket has fallen so much that the tax is now a large component of the total cost.
In the same way the falling costs of money management are now making the tax on investing a much larger, and more visible, component. It is getting harder for the new range of low cost funds to bury it. The gradual erosion of initial commission and the move from a bid offer spread to single pricing now means that any other costs are more obvious. It is for this reason that Vanguard imposes a 0.5% charge to cover stamp duty for investors in its low cost UK funds. That sort of pricing is likely to become more widespread as fund charges come down. However, unlike buying airline tickets the impact of tax is now starting to influence behaviour, something that taxes are not supposed to do.
In the case of investing the problem lies with stamp duty. It is bad enough having to pay it on houses at an exorbitant rate but the imposition of it on investing is ludicrous. No one is any doubt that the country faces a huge pension crisis as the erosion of defined benefit pension schemes moves the onus of saving for retirement onto the individual and away from the state and the employer. Added to that is the gradual decrease in mortality rates which is increasing the liability to be funded from a pension. The scale of this shortfall is vast and can only be solved by individuals making their own savings arrangements through ISAs, SIPPs and other pension schemes.
The investment time scale for pensions stretches over several decades and that will draw many savers to equities. You would think the Government would be keen to encourage savers and move the liability from the Treasure to individuals. But no, the Government takes 0.5% of your already taxed earnings as stamp duty before any money goes into an asset.…
