“If no one ever took risks, Michelangelo would have painted the Sistine floor.”

Neil Simon, playwright

On Wednesday 27 October Rishi Sunak delivers his first Budget where emphasis can be given to the longer-term plans of this Government, rather than Covid-19. Having said that, there’s a massive overhang of debt as a result of the past eighteen months, which represents a significant contingent liability if interest rates were to move sharply upwards.

The advance announcement of changes to National Insurance deductions in order to provide funding for social care and the NHS gives him the opportunity to set out a more forward-looking Budget, and we’ve already seen major investment plans for public transport outside London and the South-East, in order to support the levelling-up agenda.

Drawing on investment from the private sector is a key part of moving forwards, and care will have to be taken not to discourage risk-taking by taxation changes. So in this commentary we ask for a proper recognition of the risks that investors take, together with suggesting a useful investment that the Chancellor could make in helping to prepare people better for old age.

It's nearly a year since the ‘Office of Tax Simplification’ proposed aligning capital gains tax with income tax, and at the time it was good to note that ‘his Treasury allies have already distanced Sunak from the report’. Let us hope this is still the case.

The point is not, as was made in City AM at the time, that investments are more often than not made out of taxed income. It's about recognising the risks that investors take of losing the value of their assets.

Sixteen years ago, I prepared a paper called ‘The Art of Building Wealth’. Many people think financial planning is more of a science; but when it comes to investment there’s no doubt that it is definitely an art, where there are no right or wrong answers and it's all down to subjective judgement.

The first heading read ‘Risk, like tax, is always with us’. A few key points were set out as follows:

  • Risk is a subjective judgement.
  • Risk is relative, depending on, for example, how you approach that risk, the nature of the risk and even your age.
  • Risk does not remain constant, but can change when external events change.
  • What is considered risky by some may be considered less risky by others.
  • And lastly, there are some risks that only a professional should take.

Earning money by working is completely different from trying to build value from capital gains on investment, and the key difference is that real risk of loss of capital value. If that is not properly taken into account in the tax system, people just won’t invest in risky assets like equity shares - there are many alternative uses to which their money can be put.

So let's hope that Rishi Sunak remains committed to encouraging investment by rewarding risk-takers.

‘The Art of Building Wealth’ also started by quoting an old saying, often repeated by the then Bishop of Oxford, Rt. Revd. (now Lord) Richard Harries, about health, wealth and time. His point was that at each of the three main stages of adult life you can have two, but not usually all three:

  • Health and time when you are young, but not normally wealth;
  • Health and wealth when you are middle-aged, but not often time;
  • Time and wealth when you are old, but not necessary health.

Preparation for the first two stages is normally good in modern societies. We spend years learning at school and university how to handle our health and time when we're young, even though experience (rather than financial education) is the main preparation for building wealth. It’s also a good investment for the state, who see a return in terms of tax flow over subsequent working lives.

However, we do practically nothing in the way of preparing people for old age; and that is a great and very serious omission. Huge chunks of public money are spent financing old age in terms of deteriorating health, the need for social care and pensions. If significant savings could be made on these, the returns for the public purse could also be substantial here.

Political logic points to the fact that old people are more likely to vote, so it's worthwhile looking after them: but financial logic would suggest that if the country were to invest just a tiny fraction of the education budget committed to preparing young people to those approaching old age, there would indeed be substantial downstream savings (quite apart from more fulfilling lives).

So we suggest that a simple online learning course should be offered to people in their 60s, focusing mainly on how to look after themselves as they grow old: particularly in terms of health and financial planning, and on how to stay active - because we know that ‘if you don't use it you lose it’!

The course could be piloted to assess its effectiveness - but if it works it may be worth incentivising people to take it, in recognition of the returns it would generate for the Exchequer.

Now there's a little extra something for the Chancellor to think about ..

Gavin Oldham OBE

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