WEBVTT - A Lesson Learnt from Australian Pension Funds 

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio news. Welcome bloom Maren talks

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<v Speaker 1>Money Market Wrap, but we talk about the biggest moves

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<v Speaker 1>in the markets this weekend and what's driving them. I'm

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<v Speaker 1>Maren Something's Up, web editor at large for Bloomberg UK Wealth.

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<v Speaker 2>And I'm joined Stairviaks in your report for Bloombeer and

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<v Speaker 2>author of the Money Distilled newsletter.

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<v Speaker 1>Almost thought you were't got to remember what you did there.

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<v Speaker 2>Touching is touching? Go?

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<v Speaker 1>Yeah, yeah, I mean there are instructions in our script.

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<v Speaker 1>Sometimes I'm going to put one in your Synkeep breathing

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<v Speaker 1>right now, it's just like lie the introduction, nice disciven,

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<v Speaker 1>because we're not really going to talk about the biggest

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<v Speaker 1>moves in the markets. What we're actually going to talk

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<v Speaker 1>about is UK inflation coming in unexpectedly high brackets again,

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<v Speaker 1>soot five percent for the year to the end of April,

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<v Speaker 1>which is as high as it's been since last January

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<v Speaker 1>twenty four last January. So higher than expected, not madly

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<v Speaker 1>higher than expected, but nonetheless this is not great. We

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<v Speaker 1>want to see it coming back down towards two percent,

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<v Speaker 1>which is where for reasons nobody knows it is supposed

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<v Speaker 1>to be and that isn't really happening, right John, you

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<v Speaker 1>wrote about this this morning.

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<v Speaker 2>Yeah, look, everyone knew there was going to be a jump,

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<v Speaker 2>and to be honest, like three point five percent is

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<v Speaker 2>higher than was expected, but it's well, we're in the

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<v Speaker 2>realms of possibility. But I think the real problem for

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<v Speaker 2>the Bank of England now is the base rate is

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<v Speaker 2>at four point twenty five percent now in normal times,

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<v Speaker 2>as in before two thousand and eight, the base rate

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<v Speaker 2>is higher than the inflation rate. And then if you

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<v Speaker 2>do that like a tiny spreadsheet that's really easy to

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<v Speaker 2>do and just take the average of what inflation normally

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<v Speaker 2>comes in at each month over the last thirty or years.

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<v Speaker 2>If you look at that, then inflation is very likely

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<v Speaker 2>to stay an annual rate of between three point four

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<v Speaker 2>and four in a bit percent this year for the

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<v Speaker 2>rest of this year. So the point is the Bank

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<v Speaker 2>England really doesn't have very much breathing space to cut

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<v Speaker 2>interest rates further without being at risk of CPI inflation

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<v Speaker 2>going back above the bank rate at some point this year,

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<v Speaker 2>and already RPI inflation. I know no one likes RPI,

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<v Speaker 2>but it is still used to index link a lot

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<v Speaker 2>of guilts and contracts.

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<v Speaker 1>Now like abi's still a really important number. I mean

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<v Speaker 1>on student loans still index to RBI, yes, I'm afraid

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<v Speaker 1>on them is RPI plus yeah and.

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<v Speaker 2>Four point five now and that's the first time it's

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<v Speaker 2>been above the bank rate since the end of twenty

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<v Speaker 2>twenty three, and before that again, during the pre two

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<v Speaker 2>thousand and eight normal era, RPI was always below the

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<v Speaker 2>bank route. So I think it's this is very uncomfortable

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<v Speaker 2>politically for the Bank of England as much as anything else.

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<v Speaker 1>But it's policy and competent driven inflation, isn't it. I

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<v Speaker 1>mean this is waterbild, syr's, build, energy, build, all that

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<v Speaker 1>kind of thing. So it was uncomfortable for the Bank

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<v Speaker 1>of England, but it should be extremely uncomfortable for our

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<v Speaker 1>political leaders as well, what with them being in charge

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<v Speaker 1>of all those vital infrastructure areas and their costs.

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<v Speaker 2>Yes, but there's there's very that's very little that they'll

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<v Speaker 2>take any responsibility for and the something I mean for

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<v Speaker 2>all that, I don't think the government is doing a

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<v Speaker 2>very good job. This is compounded problems from years and

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<v Speaker 2>years and years. Mess mind.

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<v Speaker 1>When I when I say the government, I don't even bement.

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<v Speaker 1>I mean decades. Well, yeah, government, you know, I mean

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<v Speaker 1>I keep reading about reservoirs, which I'm rather bothered about

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<v Speaker 1>at the moment. Is you know, I live in Scotland

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<v Speaker 1>where we have no short of water, but already there's

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<v Speaker 1>conversations about, you know, where we will have to have

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<v Speaker 1>hostpipe bands and new restrictions on those and restrictions on that.

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<v Speaker 2>But of course if we.

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<v Speaker 1>Just built some reservoirs, had built any reservoirs after over

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<v Speaker 1>the last couple of decades, we wouldn't really need to

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<v Speaker 1>worry about that kind of thing.

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<v Speaker 2>Oh maybe an aquid talk between Classgow and Edinburgh. Yeah,

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<v Speaker 2>because you know you're never going to get a shortage

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<v Speaker 2>in Glasgow.

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<v Speaker 1>That's absolutely true, is that? But you know we can't even.

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<v Speaker 2>Build roads bring back Roman times. That's why I say.

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<v Speaker 1>John, we are actually planning to do more economic history

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<v Speaker 1>on this podcast, and we have got a few good

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<v Speaker 1>economic history pods coming up. But John is jumping the

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<v Speaker 1>gun slightly that nobody listened to John on Roman financial

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<v Speaker 1>history at the moment. That time will come anyway. So

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<v Speaker 1>the key question then is does this mean that that

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<v Speaker 1>people who are waiting hanging on for interest rates to

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<v Speaker 1>fall significantly over the next year because they think they'll

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<v Speaker 1>get achieved and mortgage low rate on their loan, etc.

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<v Speaker 1>Should they stop waiting give up? What do you think

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<v Speaker 1>is going to happen now?

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<v Speaker 2>I mean I think they should. I think you have

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<v Speaker 2>to be very careful. I mean, obviously you should. Your

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<v Speaker 2>personal finances should never be reliant or an interest rate

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<v Speaker 2>variable change and to the point where it's going to

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<v Speaker 2>ruin your life if it doesn't go your way. But

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<v Speaker 2>more than that, I mean, if you look at what

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<v Speaker 2>was harming and this is something Knee you look into

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<v Speaker 2>in more detail. We feel it has happened to long

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<v Speaker 2>dated bonds, then the interest rates on long term debt,

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<v Speaker 2>and this is across the world, is not just the UK,

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<v Speaker 2>but the UK is quite vulnerable. Is going through the roof, actually,

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<v Speaker 2>especially since the start of May. I mean for all

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<v Speaker 2>that you know we kind of had the big panic

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<v Speaker 2>about Liz trust Well, the thirty year gilt is now

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<v Speaker 2>well above where it was in October twenty twenty two,

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<v Speaker 2>and the ten year gilt is also higher than it

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<v Speaker 2>was back then as well. So it's long term interest

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<v Speaker 2>rates are not coming down, they're going up the way.

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<v Speaker 2>And those are the ones that will come from not

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<v Speaker 2>the thirty year and the tenure. But I would not

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<v Speaker 2>rely on your mortgage rate coming down in the very

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<v Speaker 2>near future or any time. Really, that doesn't mean it won't.

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<v Speaker 2>I mean maybe it will, but I certainly wouldn't better

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<v Speaker 2>on it.

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<v Speaker 1>Okay, So John, you then approve of hope based personal finance.

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<v Speaker 2>I feel that hope is not a strategy, as I'm

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<v Speaker 2>sure someone was said.

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<v Speaker 1>Fair enough. All right, Listen. The other thing that's been

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<v Speaker 1>bothering both of us this week, and you've also written about,

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<v Speaker 1>and it sounds niche, but it totally isn't is this

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<v Speaker 1>business of Australian pensions and the idea that they are

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<v Speaker 1>going to begin to tax inside pension wrappers unrealized gains

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<v Speaker 1>above a certain asset base. And that's it's a it's complicated, difficult, confusing.

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<v Speaker 1>The numbers are a nightmare. What do you do if

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<v Speaker 1>you tax again that's never been realized and it turns

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<v Speaker 1>into a loss. All these things are very complicated. It's

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<v Speaker 1>a very strange policy and it's a worry because we

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<v Speaker 1>have Angela Rainer out there sending memos around the players

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<v Speaker 1>asking how to raise more taxes on what she considers

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<v Speaker 1>to be the well off in the UK, and I'm

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<v Speaker 1>sure that she looks all around the world to pull

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<v Speaker 1>up ideas and here is one, but a dangerous one, right.

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<v Speaker 2>Yeah, I mean this is very interesting, and I think,

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<v Speaker 2>like every patient system, this showing system is complicated, and

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<v Speaker 2>I'm sure that the nuances to the cly how appreciated,

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<v Speaker 2>and the way the tax really works and all the

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<v Speaker 2>rest of it is slightly different, you know. But the pension,

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<v Speaker 2>the strengthen system is regarded as being a sort of

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<v Speaker 2>exemplar for the rest of the world, basically because they

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<v Speaker 2>introduced auto enrollment in the nineteen nineties and then we're

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<v Speaker 2>able to afford to keep putting it up, so their

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<v Speaker 2>auto enrollment is something like twelve percent now, and it

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<v Speaker 2>basically means the most Aussies have a decent personal pension.

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<v Speaker 2>And the problem is, obviously, is that once you reach

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<v Speaker 2>a kind of tipping point, the government stops trying to

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<v Speaker 2>encourage you to save and then starts looking at all

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<v Speaker 2>those pots that you've built up and starts saying, well,

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<v Speaker 2>i'm isn't it that's all money? Because you know, that's

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<v Speaker 2>just the way the governments think. And so the fact

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<v Speaker 2>that there's a kind of handful of people who've built

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<v Speaker 2>up like really massive amounts in these savings pots. Means

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<v Speaker 2>that the you know, the current government is thinking, well,

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<v Speaker 2>there must be a way for us to get our

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<v Speaker 2>hands on that. And so the issue is that they've

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<v Speaker 2>introduced this or that they are trying to introduce this

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<v Speaker 2>new band on savings of above three million ausy dollars,

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<v Speaker 2>which is about one point four million British pounds. And

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<v Speaker 2>again the issue is that they are for the first

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<v Speaker 2>time they're taxing unrealized capital gains. So it's a very

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<v Speaker 2>complicated the way they work it out, but basically, the

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<v Speaker 2>portion of your money that is above three million, they

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<v Speaker 2>then attribute the same portion of gains in a year

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<v Speaker 2>to that that bit of your pot, and it means

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<v Speaker 2>that you get hit with a tax bill for that,

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<v Speaker 2>whether or not you've sold the assets that are involved.

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<v Speaker 2>And one of the big problems for the Australians in

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<v Speaker 2>particular is that the farmers there often keep their farms

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<v Speaker 2>in their pensions, so they're sort of facing the similar

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<v Speaker 2>issue to the inheritance tax over here, whereby the farm

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<v Speaker 2>is worth a lot of money, but it doesn't generate

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<v Speaker 2>any real money, and so you know that you're going

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<v Speaker 2>to come across all these liquidity problems and all the

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<v Speaker 2>rest of it. But really the big issues the principle,

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<v Speaker 2>as you say, it's the idea that you know, the

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<v Speaker 2>governments have generally shaded away from this because it tends

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<v Speaker 2>not to watch whenever they've tried it. But the fact

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<v Speaker 2>that was another say call of trying all of these

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<v Speaker 2>stupid ideas again.

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<v Speaker 1>Yeah, the whole idea of tax system make them simple

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<v Speaker 1>and straightforward, which is why we normally tax stuff at

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<v Speaker 1>the point of exchange, right. We tax transactions, so you

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<v Speaker 1>touch money when it's moving, when it's going from employer

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<v Speaker 1>to person, when it's going from company to person, vira

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<v Speaker 1>a dividend, when it's been called out of a pension,

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<v Speaker 1>when you sell something. Trying to tax things when they're

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<v Speaker 1>when they're not exchanging hands is very difficult, which of

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<v Speaker 1>course why wealth taxes never really work, etcetera. Why we

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<v Speaker 1>always replace it, well taked with the transaction tax of

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<v Speaker 1>some kind in the end, so it does seem a

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<v Speaker 1>very backward facing move. But but but but back to

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<v Speaker 1>Angela Raina and her members. You know, we gather that

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<v Speaker 1>she was looking for richul Reeves, have a good another

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<v Speaker 1>three or four billion a year by doing you know,

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<v Speaker 1>some stuff a bit like this. There are other things

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<v Speaker 1>like scrapping tax free dividend allowance and extending the freeze

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<v Speaker 1>on the forty five percent thresholder this kind of thing

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<v Speaker 1>is eventually inevitable because I mean, it's fiddling around the edges.

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<v Speaker 1>Of course, the only answer to raising a lot more

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<v Speaker 1>tax in the UK is to expand the tax base,

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<v Speaker 1>and that's a much longer conversation than we're going to

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<v Speaker 1>have today. But the other thing that apparently she's keen

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<v Speaker 1>on is this idea of reentertating the lifetime allowance on

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<v Speaker 1>UK pensions, which is not quite the same as you've

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<v Speaker 1>just described, but again leads us into a into ad men.

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<v Speaker 2>Hell yeah, you're reintroducing it whenever he's scrapped in the

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<v Speaker 2>first place, because it was causing all of these problems

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<v Speaker 2>at the top end of the public sector. That's why

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<v Speaker 2>they got ready in the first place. And I mean,

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<v Speaker 2>I mean, this is the issue with pension schemes across

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<v Speaker 2>the world actually, because there's a there's an element of

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<v Speaker 2>this in the Australian one as well. It's the public

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<v Speaker 2>sector employees all of dB pension schemes, and usually whenever

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<v Speaker 2>you mess about with the can a lifetime cap and

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<v Speaker 2>all the rest of those are actually the first people

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<v Speaker 2>that get caught by it because their pensions are so generous.

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<v Speaker 2>And so then there's the whole political cannot fight over

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<v Speaker 2>actually we can't tax these people, but we want to

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<v Speaker 2>tax these people in the private sector, and it's like, well,

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<v Speaker 2>how do you do that? I mean, that's why we

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<v Speaker 2>ended up with employer national insurance getting raised in the

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<v Speaker 2>budget rather than anything else, because that only falls on

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<v Speaker 2>private sector employees and companies, and you know, the public

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<v Speaker 2>sector was kept safe from it. Again, it's one of

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<v Speaker 2>these issues that starts to tea you down, and the

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<v Speaker 2>idea does a favored group of people and an un

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<v Speaker 2>favored group of people who will pay for everything.

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<v Speaker 1>Oh, we know, we know that's true, though, I mean.

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<v Speaker 2>That's always just getting more divisive, like that is getting

0:11:32.240 --> 0:11:34.920
<v Speaker 2>worse and worse the more obviously, the more stretched to

0:11:34.960 --> 0:11:38.199
<v Speaker 2>the public finances become. There are so many people who

0:11:38.200 --> 0:11:39.040
<v Speaker 2>are untouchable.

0:11:39.559 --> 0:11:42.640
<v Speaker 1>It is interesting, this whole idea that the rich don't

0:11:42.640 --> 0:11:45.439
<v Speaker 1>pay enough tax, the highly paid don't pay enough tax, etcetera.

0:11:45.480 --> 0:11:47.680
<v Speaker 1>And they must pay more and more and more. And

0:11:47.800 --> 0:11:50.160
<v Speaker 1>you know, there's been discussion around this idea that everything

0:11:50.240 --> 0:11:52.360
<v Speaker 1>was better back in the sixties and seventies when tax

0:11:52.440 --> 0:11:54.839
<v Speaker 1>rates were higher. And then, of course is it Dan

0:11:54.920 --> 0:11:57.960
<v Speaker 1>Needle who's done this number showing that back in the

0:11:58.000 --> 0:12:01.400
<v Speaker 1>late nineteen seventies, seventy eight, seventy nine, and when the

0:12:01.440 --> 0:12:04.040
<v Speaker 1>highest income tax rate was eighty three percent and the

0:12:04.160 --> 0:12:07.480
<v Speaker 1>highest tax rate on unearned income was ninety eight percent.

0:12:07.520 --> 0:12:11.240
<v Speaker 1>For Haven's sake, the top one percent one percent only

0:12:11.280 --> 0:12:13.600
<v Speaker 1>paid eleven percent of the tax in the UK, whereas

0:12:13.640 --> 0:12:19.360
<v Speaker 1>now many many many years later, with rates ostentaibly significantly lower,

0:12:19.400 --> 0:12:21.760
<v Speaker 1>they were twenty nine percent. The top one percent paid

0:12:21.800 --> 0:12:23.199
<v Speaker 1>twenty nine percent.

0:12:23.600 --> 0:12:25.520
<v Speaker 2>That's wild that it used to be eleven percent. And

0:12:26.440 --> 0:12:29.680
<v Speaker 2>I've got it Dine's thing on my long reading list.

0:12:30.080 --> 0:12:32.560
<v Speaker 1>It is worth reading. You know, one percent paying nearly

0:12:32.600 --> 0:12:36.600
<v Speaker 1>thirty percent. I think maybe that broad his shoulders are

0:12:36.600 --> 0:12:37.920
<v Speaker 1>carrying quite a lot there.

0:12:38.080 --> 0:12:42.600
<v Speaker 2>Yeah, top and especially in terms of the income tax,

0:12:43.480 --> 0:12:46.320
<v Speaker 2>there's the super super wealthy and the zero points zero

0:12:46.360 --> 0:12:49.079
<v Speaker 2>one percent of who still do pay a lot of tax.

0:12:49.120 --> 0:12:52.440
<v Speaker 2>And also generally, you know, create a lot of jobs,

0:12:52.480 --> 0:12:55.480
<v Speaker 2>build things, et cetera, et cetera. But once you're get

0:12:55.559 --> 0:12:58.720
<v Speaker 2>down the one percent and the pain thirty percent income

0:12:58.760 --> 0:13:03.120
<v Speaker 2>tax that that can be you know that that is

0:13:03.480 --> 0:13:07.400
<v Speaker 2>pa ye employees at the peak of their career and

0:13:07.440 --> 0:13:09.080
<v Speaker 2>lots of ways. And this sort of goes back to

0:13:09.120 --> 0:13:11.520
<v Speaker 2>the thing that we discussed in one of the podcasts

0:13:11.559 --> 0:13:15.480
<v Speaker 2>earlier this week where we got an email from a

0:13:15.520 --> 0:13:19.560
<v Speaker 2>youngish guy who was basically earning lots of good money

0:13:20.000 --> 0:13:22.640
<v Speaker 2>but feeling, actually, what is the point in carrying on

0:13:23.320 --> 0:13:25.920
<v Speaker 2>working hard because I'm going to get better in the

0:13:25.960 --> 0:13:28.719
<v Speaker 2>back say that every single ton if I earn any

0:13:28.800 --> 0:13:32.640
<v Speaker 2>more than I get just now. So, yeah, it contributes

0:13:32.679 --> 0:13:37.680
<v Speaker 2>to that that lacked desire to, you know, maintain your.

0:13:37.720 --> 0:13:42.440
<v Speaker 1>Ambition incentives, incentives, incentives and centers. And I think sadly

0:13:42.520 --> 0:13:44.440
<v Speaker 1>John and I have very little optimism that this one

0:13:44.480 --> 0:13:48.200
<v Speaker 1>will turn around. So watch out for more slightly admin

0:13:48.320 --> 0:13:51.839
<v Speaker 1>heavy and irritating and probably pointless taxes coming in the UK.

0:13:52.280 --> 0:13:53.679
<v Speaker 1>And before we go, one of thing to say is

0:13:53.720 --> 0:13:56.079
<v Speaker 1>if you're interested in what John was mentioning earlier about

0:13:56.120 --> 0:13:59.880
<v Speaker 1>Bondiel's around the Developed World rising, please do listen to tomorrow's

0:13:59.800 --> 0:14:02.800
<v Speaker 1>pott where we will be talking about that at some length,

0:14:02.840 --> 0:14:09.199
<v Speaker 1>it's very very important. Thanks for listening to this week's

0:14:09.200 --> 0:14:12.200
<v Speaker 1>Maren Talks Money Market round Up. If you like us show, rate, review,

0:14:12.240 --> 0:14:14.679
<v Speaker 1>and subscribe wherever you listen to podcasts altho I have

0:14:14.720 --> 0:14:16.400
<v Speaker 1>you show to follow me in John on ex or

0:14:16.400 --> 0:14:20.120
<v Speaker 1>Twitter at marins w and John Underscore Stepic. This episode

0:14:20.160 --> 0:14:22.560
<v Speaker 1>was produced by some Asaudi production of support and sound

0:14:22.560 --> 0:14:25.360
<v Speaker 1>designed by Moses and Questions and comments on this show

0:14:25.400 --> 0:14:28.720
<v Speaker 1>and all our shows are always welcome. Our show email

0:14:28.880 --> 0:14:31.520
<v Speaker 1>is Merenmoney at Bloomberg dot net