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Don’t get fooled again: a Daily Mail budget proposal with a Financial Times impact

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George Osborne unveiled significant changes to the UK pensions landscape in his budget on Wednesday. Hailed as a revolution and freedom for the common man, Julian Parrott argues the changes were in fact an illusory, Daily Mail-focused con.

Roger Daltrey may not have achieved his apparent desire to “die before I get old” but at least he has the multimillions derived from rockstar royalties, business and a highly rewarding touring circuit to fall back on in his dotage. Not for him the decisions about whether to take the tax free cash, annuitise or drawdown income from his pension. But to paraphrase Roger again, I issue a word of caution to his baby boomer fans and the many of us to follow – “Don’t get fooled again”!

George Osborne’s acutely political act of sophistry in his budget on Wednesday was part two of his idol Maggie Thatcher’s first introduction of pension ‘freedom’ in the 1980s. At the time, like today, some adjustments to the pensions structure were necessary but the centre piece of that legislation was the ‘freedom’ to opt out of your final salary scheme or move your pension fund to your own ‘personal fund’ and have ‘control’ over your future. This went hand in hand with the ‘freedom’ to reclaim State Earnings-Related Pension Scheme (SERPs) contributions from the state and put them in your own pot.

This new-found freedom was the first death knell of the late lamented final salary scheme and led directly to the pensions mis-selling scandals of the 90s. In fact, so bad were these reforms that the SERPs opt out were effectively cancelled some 10 years ago and Osborne’s proposals are consulting on the total ban of occupational pension transfers.

I hear a lot in the media about “taking the shackles off” and “freedom to choose”, but if life has shown us anything it’s the lack of financial sophistication and literacy that the general public have shown over years with their finances. That we have a massively under-saved population with an obsession for housing and a deep suspicion of pensions is undeniable – I have my doubts whether the proposals unveiled on Wednesday are the solution. I have already had my first enquiry for a pension ‘cash-in’ from a significantly under-funded client who could really do to save more not cash in.

The proposals demonstrate what a clever political operator Osborne is. The pension proposals appeal to the many but really only make significant impact on the few, and those few are the wealthiest. This is a Daily Mail budget proposal with a Financial Times impact.

The reality is that for those with small pension pots the ‘choice’ is illusory. With a small pot, there are limited choices about what they can do for an income. The cost, risk and complexity of a managed drawdown fund put it out of reach of those without other resources to fall back on.  The safe, secure income option other than an annuity is to draw an income form a deposit account. With interest rates at 2.5% for a three-year bond at best, that is well below what an annuity will offer you and inflation erodes your capital every year. The conundrum for any income-seeking capital investor is that if you need the income, you can’t spend the capital.

Annuities serve a purpose – to give people certainty over future income, a monthly payment to pay the bills. The annuity market has been changed dramatically, not by major life companies portrayed as celebrating at every early death of an annuitant (there is a cross subsidy factored into every annuity calculation) but by the impacts of free market capitalism. Most notably, the massive fall in gilt yields arising from the fallout of the financial crisis but also the cherrypicking of the very lives that help to cross subsidise the market by the enhanced annuity providers. For those with very strongly held, often faith beliefs, the need to draw a gilts-based annuity that benefits from others’ mortality will be welcome, but that was effectively there with drawdown anyway.

The winners, as ever, from these proposals are the wealthiest. The options to draw down and control the flow of money works well with individuals who already have enough money to live on and want to play the tax system with their income flows – perhaps funding with higher rate tax relief when incomes are high and drawing out at basic rate when incomes can be manipulated as low. With no compulsion to annuitise or for the pension pot to suffer 55% penalty charges on death, the pension now becomes a valuable tool in the hands of the planner for mitigation of inheritance tax.

It was politically unacceptable for the chancellor who, in opposition, promised a £1m inheritance tax nil rate band, but in these proposals he has gone a long way to introducing it by stealth.  All over the country, the wealthiest are engaged with their advisers as to how they can use this new-found freedom to pass this pot that has been built up on higher rate relief over to the next generation.

One thing is for sure, Osborne has caused “a big sensation”. Queue up for the Magic Bus.

Julian Parrott is a founding partner of Ethical Futures, ethical specialist independent financial advisers (IFA) based in Edinburgh.

Further reading:

Osborne is fiddling while the Earth burns: ‘extracting every drop of oil we can’

Budget 2014: Pensions shake-up divides industry – but may boost sustainable investment

Budget 2014: Osborne freezes carbon price floor and boosts North Sea oil

Budget 2014: Investment tax relief to boost social enterprises

Budget 2014: the reaction

Julian Parrott is a founding partner of Ethical Futures, ethical specialist independent financial advisers (IFA) based in Edinburgh.

Economy

Will Self-Driving Cars Be Better for the Environment?

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self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo | https://www.shutterstock.com/g/zapp2photo

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.

Deadheading

Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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