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A Lesson Learnt from Australian Pension Funds · Merryn Talks Money

• 0:02
  Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. Welcome bloom Maren talks
• 0:19
  Speaker 1: Money Market Wrap, but we talk about the biggest moves
• 0:21
  Speaker 1: in the markets this weekend and what's driving them. I'm
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  Speaker 1: Maren Something's Up, web editor at large for Bloomberg UK Wealth.
• 0:27
  Speaker 2: And I'm joined Stairviaks in your report for Bloombeer and
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  Speaker 2: author of the Money Distilled newsletter.
• 0:33
  Speaker 1: Almost thought you were't got to remember what you did there.
• 0:38
  Speaker 2: Touching is touching? Go?
• 0:40
  Speaker 1: Yeah, yeah, I mean there are instructions in our script.
• 0:43
  Speaker 1: Sometimes I'm going to put one in your Synkeep breathing
• 0:48
  Speaker 1: right now, it's just like lie the introduction, nice disciven,
• 0:51
  Speaker 1: because we're not really going to talk about the biggest
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  Speaker 1: moves in the markets. What we're actually going to talk
• 0:54
  Speaker 1: about is UK inflation coming in unexpectedly high brackets again,
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  Speaker 1: soot five percent for the year to the end of April,
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  Speaker 1: which is as high as it's been since last January
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  Speaker 1: twenty four last January. So higher than expected, not madly
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  Speaker 1: higher than expected, but nonetheless this is not great. We
• 1:13
  Speaker 1: want to see it coming back down towards two percent,
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  Speaker 1: which is where for reasons nobody knows it is supposed
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  Speaker 1: to be and that isn't really happening, right John, you
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  Speaker 1: wrote about this this morning.
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  Speaker 2: Yeah, look, everyone knew there was going to be a jump,
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  Speaker 2: and to be honest, like three point five percent is
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  Speaker 2: higher than was expected, but it's well, we're in the
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  Speaker 2: realms of possibility. But I think the real problem for
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  Speaker 2: the Bank of England now is the base rate is
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  Speaker 2: at four point twenty five percent now in normal times,
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  Speaker 2: as in before two thousand and eight, the base rate
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  Speaker 2: is higher than the inflation rate. And then if you
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  Speaker 2: do that like a tiny spreadsheet that's really easy to
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  Speaker 2: do and just take the average of what inflation normally
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  Speaker 2: comes in at each month over the last thirty or years.
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  Speaker 2: If you look at that, then inflation is very likely
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  Speaker 2: to stay an annual rate of between three point four
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  Speaker 2: and four in a bit percent this year for the
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  Speaker 2: rest of this year. So the point is the Bank
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  Speaker 2: England really doesn't have very much breathing space to cut
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  Speaker 2: interest rates further without being at risk of CPI inflation
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  Speaker 2: going back above the bank rate at some point this year,
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  Speaker 2: and already RPI inflation. I know no one likes RPI,
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  Speaker 2: but it is still used to index link a lot
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  Speaker 2: of guilts and contracts.
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  Speaker 1: Now like abi's still a really important number. I mean
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  Speaker 1: on student loans still index to RBI, yes, I'm afraid
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  Speaker 1: on them is RPI plus yeah and.
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  Speaker 2: Four point five now and that's the first time it's
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  Speaker 2: been above the bank rate since the end of twenty
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  Speaker 2: twenty three, and before that again, during the pre two
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  Speaker 2: thousand and eight normal era, RPI was always below the
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  Speaker 2: bank route. So I think it's this is very uncomfortable
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  Speaker 2: politically for the Bank of England as much as anything else.
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  Speaker 1: But it's policy and competent driven inflation, isn't it. I
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  Speaker 1: mean this is waterbild, syr's, build, energy, build, all that
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  Speaker 1: kind of thing. So it was uncomfortable for the Bank
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  Speaker 1: of England, but it should be extremely uncomfortable for our
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  Speaker 1: political leaders as well, what with them being in charge
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  Speaker 1: of all those vital infrastructure areas and their costs.
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  Speaker 2: Yes, but there's there's very that's very little that they'll
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  Speaker 2: take any responsibility for and the something I mean for
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  Speaker 2: all that, I don't think the government is doing a
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  Speaker 2: very good job. This is compounded problems from years and
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  Speaker 2: years and years. Mess mind.
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  Speaker 1: When I when I say the government, I don't even bement.
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  Speaker 1: I mean decades. Well, yeah, government, you know, I mean
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  Speaker 1: I keep reading about reservoirs, which I'm rather bothered about
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  Speaker 1: at the moment. Is you know, I live in Scotland
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  Speaker 1: where we have no short of water, but already there's
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  Speaker 1: conversations about, you know, where we will have to have
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  Speaker 1: hostpipe bands and new restrictions on those and restrictions on that.
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  Speaker 2: But of course if we.
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  Speaker 1: Just built some reservoirs, had built any reservoirs after over
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  Speaker 1: the last couple of decades, we wouldn't really need to
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  Speaker 1: worry about that kind of thing.
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  Speaker 2: Oh maybe an aquid talk between Classgow and Edinburgh. Yeah,
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  Speaker 2: because you know you're never going to get a shortage
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  Speaker 2: in Glasgow.
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  Speaker 1: That's absolutely true, is that? But you know we can't even.
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  Speaker 2: Build roads bring back Roman times. That's why I say.
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  Speaker 1: John, we are actually planning to do more economic history
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  Speaker 1: on this podcast, and we have got a few good
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  Speaker 1: economic history pods coming up. But John is jumping the
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  Speaker 1: gun slightly that nobody listened to John on Roman financial
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  Speaker 1: history at the moment. That time will come anyway. So
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  Speaker 1: the key question then is does this mean that that
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  Speaker 1: people who are waiting hanging on for interest rates to
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  Speaker 1: fall significantly over the next year because they think they'll
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  Speaker 1: get achieved and mortgage low rate on their loan, etc.
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  Speaker 1: Should they stop waiting give up? What do you think
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  Speaker 1: is going to happen now?
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  Speaker 2: I mean I think they should. I think you have
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  Speaker 2: to be very careful. I mean, obviously you should. Your
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  Speaker 2: personal finances should never be reliant or an interest rate
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  Speaker 2: variable change and to the point where it's going to
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  Speaker 2: ruin your life if it doesn't go your way. But
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  Speaker 2: more than that, I mean, if you look at what
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  Speaker 2: was harming and this is something Knee you look into
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  Speaker 2: in more detail. We feel it has happened to long
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  Speaker 2: dated bonds, then the interest rates on long term debt,
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  Speaker 2: and this is across the world, is not just the UK,
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  Speaker 2: but the UK is quite vulnerable. Is going through the roof, actually,
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  Speaker 2: especially since the start of May. I mean for all
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  Speaker 2: that you know we kind of had the big panic
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  Speaker 2: about Liz trust Well, the thirty year gilt is now
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  Speaker 2: well above where it was in October twenty twenty two,
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  Speaker 2: and the ten year gilt is also higher than it
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  Speaker 2: was back then as well. So it's long term interest
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  Speaker 2: rates are not coming down, they're going up the way.
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  Speaker 2: And those are the ones that will come from not
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  Speaker 2: the thirty year and the tenure. But I would not
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  Speaker 2: rely on your mortgage rate coming down in the very
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  Speaker 2: near future or any time. Really, that doesn't mean it won't.
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  Speaker 2: I mean maybe it will, but I certainly wouldn't better
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  Speaker 2: on it.
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  Speaker 1: Okay, So John, you then approve of hope based personal finance.
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  Speaker 2: I feel that hope is not a strategy, as I'm
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  Speaker 2: sure someone was said.
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  Speaker 1: Fair enough. All right, Listen. The other thing that's been
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  Speaker 1: bothering both of us this week, and you've also written about,
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  Speaker 1: and it sounds niche, but it totally isn't is this
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  Speaker 1: business of Australian pensions and the idea that they are
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  Speaker 1: going to begin to tax inside pension wrappers unrealized gains
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  Speaker 1: above a certain asset base. And that's it's a it's complicated, difficult, confusing.
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  Speaker 1: The numbers are a nightmare. What do you do if
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  Speaker 1: you tax again that's never been realized and it turns
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  Speaker 1: into a loss. All these things are very complicated. It's
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  Speaker 1: a very strange policy and it's a worry because we
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  Speaker 1: have Angela Rainer out there sending memos around the players
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  Speaker 1: asking how to raise more taxes on what she considers
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  Speaker 1: to be the well off in the UK, and I'm
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  Speaker 1: sure that she looks all around the world to pull
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  Speaker 1: up ideas and here is one, but a dangerous one, right.
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  Speaker 2: Yeah, I mean this is very interesting, and I think,
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  Speaker 2: like every patient system, this showing system is complicated, and
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  Speaker 2: I'm sure that the nuances to the cly how appreciated,
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  Speaker 2: and the way the tax really works and all the
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  Speaker 2: rest of it is slightly different, you know. But the pension,
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  Speaker 2: the strengthen system is regarded as being a sort of
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  Speaker 2: exemplar for the rest of the world, basically because they
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  Speaker 2: introduced auto enrollment in the nineteen nineties and then we're
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  Speaker 2: able to afford to keep putting it up, so their
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  Speaker 2: auto enrollment is something like twelve percent now, and it
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  Speaker 2: basically means the most Aussies have a decent personal pension.
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  Speaker 2: And the problem is, obviously, is that once you reach
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  Speaker 2: a kind of tipping point, the government stops trying to
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  Speaker 2: encourage you to save and then starts looking at all
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  Speaker 2: those pots that you've built up and starts saying, well,
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  Speaker 2: i'm isn't it that's all money? Because you know, that's
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  Speaker 2: just the way the governments think. And so the fact
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  Speaker 2: that there's a kind of handful of people who've built
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  Speaker 2: up like really massive amounts in these savings pots. Means
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  Speaker 2: that the you know, the current government is thinking, well,
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  Speaker 2: there must be a way for us to get our
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  Speaker 2: hands on that. And so the issue is that they've
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  Speaker 2: introduced this or that they are trying to introduce this
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  Speaker 2: new band on savings of above three million ausy dollars,
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  Speaker 2: which is about one point four million British pounds. And
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  Speaker 2: again the issue is that they are for the first
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  Speaker 2: time they're taxing unrealized capital gains. So it's a very
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  Speaker 2: complicated the way they work it out, but basically, the
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  Speaker 2: portion of your money that is above three million, they
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  Speaker 2: then attribute the same portion of gains in a year
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  Speaker 2: to that that bit of your pot, and it means
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  Speaker 2: that you get hit with a tax bill for that,
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  Speaker 2: whether or not you've sold the assets that are involved.
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  Speaker 2: And one of the big problems for the Australians in
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  Speaker 2: particular is that the farmers there often keep their farms
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  Speaker 2: in their pensions, so they're sort of facing the similar
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  Speaker 2: issue to the inheritance tax over here, whereby the farm
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  Speaker 2: is worth a lot of money, but it doesn't generate
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  Speaker 2: any real money, and so you know that you're going
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  Speaker 2: to come across all these liquidity problems and all the
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  Speaker 2: rest of it. But really the big issues the principle,
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  Speaker 2: as you say, it's the idea that you know, the
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  Speaker 2: governments have generally shaded away from this because it tends
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  Speaker 2: not to watch whenever they've tried it. But the fact
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  Speaker 2: that was another say call of trying all of these
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  Speaker 2: stupid ideas again.
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  Speaker 1: Yeah, the whole idea of tax system make them simple
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  Speaker 1: and straightforward, which is why we normally tax stuff at
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  Speaker 1: the point of exchange, right. We tax transactions, so you
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  Speaker 1: touch money when it's moving, when it's going from employer
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  Speaker 1: to person, when it's going from company to person, vira
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  Speaker 1: a dividend, when it's been called out of a pension,
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  Speaker 1: when you sell something. Trying to tax things when they're
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  Speaker 1: when they're not exchanging hands is very difficult, which of
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  Speaker 1: course why wealth taxes never really work, etcetera. Why we
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  Speaker 1: always replace it, well taked with the transaction tax of
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  Speaker 1: some kind in the end, so it does seem a
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  Speaker 1: very backward facing move. But but but but back to
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  Speaker 1: Angela Raina and her members. You know, we gather that
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  Speaker 1: she was looking for richul Reeves, have a good another
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  Speaker 1: three or four billion a year by doing you know,
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  Speaker 1: some stuff a bit like this. There are other things
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  Speaker 1: like scrapping tax free dividend allowance and extending the freeze
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  Speaker 1: on the forty five percent thresholder this kind of thing
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  Speaker 1: is eventually inevitable because I mean, it's fiddling around the edges.
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  Speaker 1: Of course, the only answer to raising a lot more
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  Speaker 1: tax in the UK is to expand the tax base,
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  Speaker 1: and that's a much longer conversation than we're going to
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  Speaker 1: have today. But the other thing that apparently she's keen
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  Speaker 1: on is this idea of reentertating the lifetime allowance on
• 10:16
  Speaker 1: UK pensions, which is not quite the same as you've
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  Speaker 1: just described, but again leads us into a into ad men.
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  Speaker 2: Hell yeah, you're reintroducing it whenever he's scrapped in the
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  Speaker 2: first place, because it was causing all of these problems
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  Speaker 2: at the top end of the public sector. That's why
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  Speaker 2: they got ready in the first place. And I mean,
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  Speaker 2: I mean, this is the issue with pension schemes across
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  Speaker 2: the world actually, because there's a there's an element of
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  Speaker 2: this in the Australian one as well. It's the public
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  Speaker 2: sector employees all of dB pension schemes, and usually whenever
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  Speaker 2: you mess about with the can a lifetime cap and
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  Speaker 2: all the rest of those are actually the first people
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  Speaker 2: that get caught by it because their pensions are so generous.
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  Speaker 2: And so then there's the whole political cannot fight over
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  Speaker 2: actually we can't tax these people, but we want to
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  Speaker 2: tax these people in the private sector, and it's like, well,
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  Speaker 2: how do you do that? I mean, that's why we
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  Speaker 2: ended up with employer national insurance getting raised in the
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  Speaker 2: budget rather than anything else, because that only falls on
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  Speaker 2: private sector employees and companies, and you know, the public
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  Speaker 2: sector was kept safe from it. Again, it's one of
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  Speaker 2: these issues that starts to tea you down, and the
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  Speaker 2: idea does a favored group of people and an un
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  Speaker 2: favored group of people who will pay for everything.
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  Speaker 1: Oh, we know, we know that's true, though, I mean.
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  Speaker 2: That's always just getting more divisive, like that is getting
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  Speaker 2: worse and worse the more obviously, the more stretched to
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  Speaker 2: the public finances become. There are so many people who
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  Speaker 2: are untouchable.
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  Speaker 1: It is interesting, this whole idea that the rich don't
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  Speaker 1: pay enough tax, the highly paid don't pay enough tax, etcetera.
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  Speaker 1: And they must pay more and more and more. And
• 11:47
  Speaker 1: you know, there's been discussion around this idea that everything
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  Speaker 1: was better back in the sixties and seventies when tax
• 11:52
  Speaker 1: rates were higher. And then, of course is it Dan
• 11:54
  Speaker 1: Needle who's done this number showing that back in the
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  Speaker 1: late nineteen seventies, seventy eight, seventy nine, and when the
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  Speaker 1: highest income tax rate was eighty three percent and the
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  Speaker 1: highest tax rate on unearned income was ninety eight percent.
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  Speaker 1: For Haven's sake, the top one percent one percent only
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  Speaker 1: paid eleven percent of the tax in the UK, whereas
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  Speaker 1: now many many many years later, with rates ostentaibly significantly lower,
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  Speaker 1: they were twenty nine percent. The top one percent paid
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  Speaker 1: twenty nine percent.
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  Speaker 2: That's wild that it used to be eleven percent. And
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  Speaker 2: I've got it Dine's thing on my long reading list.
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  Speaker 1: It is worth reading. You know, one percent paying nearly
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  Speaker 1: thirty percent. I think maybe that broad his shoulders are
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  Speaker 1: carrying quite a lot there.
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  Speaker 2: Yeah, top and especially in terms of the income tax,
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  Speaker 2: there's the super super wealthy and the zero points zero
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  Speaker 2: one percent of who still do pay a lot of tax.
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  Speaker 2: And also generally, you know, create a lot of jobs,
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  Speaker 2: build things, et cetera, et cetera. But once you're get
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  Speaker 2: down the one percent and the pain thirty percent income
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  Speaker 2: tax that that can be you know that that is
• 13:03
  Speaker 2: pa ye employees at the peak of their career and
• 13:07
  Speaker 2: lots of ways. And this sort of goes back to
• 13:09
  Speaker 2: the thing that we discussed in one of the podcasts
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  Speaker 2: earlier this week where we got an email from a
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  Speaker 2: youngish guy who was basically earning lots of good money
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  Speaker 2: but feeling, actually, what is the point in carrying on
• 13:23
  Speaker 2: working hard because I'm going to get better in the
• 13:25
  Speaker 2: back say that every single ton if I earn any
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  Speaker 2: more than I get just now. So, yeah, it contributes
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  Speaker 2: to that that lacked desire to, you know, maintain your.
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  Speaker 1: Ambition incentives, incentives, incentives and centers. And I think sadly
• 13:42
  Speaker 1: John and I have very little optimism that this one
• 13:44
  Speaker 1: will turn around. So watch out for more slightly admin
• 13:48
  Speaker 1: heavy and irritating and probably pointless taxes coming in the UK.
• 13:52
  Speaker 1: And before we go, one of thing to say is
• 13:53
  Speaker 1: if you're interested in what John was mentioning earlier about
• 13:56
  Speaker 1: Bondiel's around the Developed World rising, please do listen to tomorrow's
• 13:59
  Speaker 1: pott where we will be talking about that at some length,
• 14:02
  Speaker 1: it's very very important. Thanks for listening to this week's
• 14:09
  Speaker 1: Maren Talks Money Market round Up. If you like us show, rate, review,
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