Investing in the future starts now

The proposal came from the policy paper issued by the IPPR Commission on Economic Justice, which puts forward the case for the creation of a Citizens’ Wealth Fund from which such payments would be made.

It is seeking to address the growing problem of generational wealth inequality.

The idea of unrestricted use of the £10,000 payment fills me with dread of it being blown on a new car, a dream holiday or high fashion.

Similarly, another recent paper issued by the Intergenerational Commission (IC) sets out a wide-ranging set of proposals to tackle this issue.

It, too, includes a similar proposal to pay what they call a ‘citizen’s inheritance’ of £10,000 from age 25, funded by a complete overhaul of inheritance tax.

However, it proposes restricting its use to provide support in four key areas: skills, entrepreneurship, housing and pension saving.

Key points

• The prospect of giving 25-year-olds £10,000 has received mixed responses
• An alternative is to invest it in a pension
• Restricting access until age 55 avoids spending the money frivolously when young

The idea of unrestricted use of the £10,000 payment fills me with dread at the prospect of it being blown on, for example, a new car, a dream holiday or high fashion, which will do nothing to resolve the issue.

Undoubtedly, I do a massive injustice to the many 25-year-olds who would spend it wisely and voluntarily use it for worthy purposes, but many will not. 

Restricting payments for use in those four main areas will undoubtedly create complexity and bureaucracy in how it would be policed.

So while huge reform, as outlined in the IC paper, may be needed, a simpler approach by adapting existing mechanisms may have a greater chance of success. 

The answer is clear

It is gratifying to see that the IPPR paper does recognise concerns over unfettered use of the payment and accepts imposing some restrictions may increase political acceptability of the proposal.

Furthermore, it could provide reassurance to the public that the £10,000 payment, which they would be contributing to but deriving no benefit from, would not be wasted on frivolous spending.

But here’s the thing – surely we already have existing mechanisms that could be adapted and, indeed, an appropriate product – a pension.

This is why a pension could be the answer:

• We have a highly successful auto-enrolment system with a minimum entry age of 22, or 18 by 2020 if DWP proposals made in 2017 go ahead. So piggyback on that by making the lump sum payment payable at age 22 into a workplace pension for those that have one, or a personal pension/self-invested personal pension for the likes of students or the self-employed.
• The kickstart of a £10,000 contribution from day one, with positive returns, will give immediate evidence of the power of investing compared with the investment returns on minimum auto-enrolment contribution levels. This would encourage savings and investment awareness and potentially drive further voluntary saving. By age 55 its value could have tripled (to more than £30,000); by age 65 it may have quadrupled (to more than £43,000); and by 75 it could have increased sixfold (to almost £62,000).
• It avoids the problem of youngsters spending the money frivolously by restricting access until age 55. Admittedly it could be spent frivolously at that age too, but at least there is guidance available by then. 
• Wealth redistribution is an ongoing issue that needs to be tackled over the long term. Pensions are the ideal product as they are already designed for the long term.
• It is recognised that even with increased minimum contributions under auto-enrolment there is the real problem of pensions being massively underfunded. The effect of an initial kickstart to pensions saving, coupled with an enhanced savings culture, would go some way to resolving this critical issue.
• Pensions already support wealth redistribution down the generations as the pension freedoms of 2015 enabled the passing on of pension funds on death to named beneficiaries, free from inheritance tax.

Alternative way of repaying

But if pensions are to gain from this initiative then should they not give too?

The pensions lifetime allowance (LTA) has been set by the government as a measure of what size pension fund it believes reasonable for individuals to accrue with its tax incentives.

Funds in excess of the LTA suffer a charge of either 25 per cent or 55 per cent, which is paid back to HM Revenue & Customs (HMRC).

There is growing criticism that the LTA has just become a tax on good investment growth and one might perceive there is significant angst at having to share this good fortune with the taxman, and for no identifiable purpose. 

So let us have HMRC redirect what it collects by way of the LTA charge, which has certainly been in excess of £100m over the past three years, into supporting the £10,000 payment process. This would redistribute part of the wealth created by the tax-incentivised pension system and good investment performance. For many this could make the LTA charge more palatable and for those with a philanthropic nature, the charge actually becomes a force for good rather than one of evil.

But what about helping resolve the other financial woes of youngsters identified in these informative papers? There are no quick fixes as wealth redistribution is a long-term game, but further thoughts include:

• The £10,000 kickstart pension contribution could ease the dilemma between making voluntary pension contributions above the minimum auto-enrolment levels and saving for a deposit, spending on further training/education or reducing debt.
• The government could work with the financial sector to reintroduce pension-linked mortgages to aid house purchases.
• In time, pension funds can be used to support setting up and running a business through the purchase of commercial property via a Sipp or small self-adminstered scheme and for the latter product, the loanback facility too.

All in all, pensions, with virtually no adaptation required, are already the perfect product to partner initiatives to rebalance intergenerational wealth.

So, let’s not give away £10,000 too quickly and unthinkingly. Instead, let’s invest in young people and their future. 

Robert Graves is head of pensions technical at Embark Group