Lack of risk capital
Sir: Surely the ever-growing size of the life and pensions funds is not due to their efficiency in collecting the nation's savings, as Mr Nicholas Davenport stated (17 December), but to our system of income tax. The starting rate and the top rate in this country are exceptionally high, and the progression from the one to the other is very steep by international standards. Therefore there is a powerful incentive at almost all levels of income to save money through life and pensions funds to avoid the payment of tax.
This situation is creating problems. The biggest is not the one described by Mr Davenport, however, but is the drying up of sources of risk capital for the starting or the expansion of independent businesses. A man who has savings in a pensions fund cannot realise them in the middle of his working life if he decides to start on his own. A man who might consider investing in a small business which someone else was running is deterred from putting his saving at risk when high rates of tax remove almost all the rewards if the enterprise becomes successful.
ICFC (which is owned by the clearing banks, not ICI) can never fill this gap as it is not an economical source for borrowing amounts of a few thousand pounds, and in any case expects those running the business to have a substantial stake in it. Other institutions have similar disadvantages. Indeed, by their nature, they do not take the risks which some individuals are willing to undertake.
To create the conditions where enough venture capital will be forthcoming individuals must be able to save and to have control of their savings. In no other way will sufficient new businesses be started to replace the ones which die off, What our economy needs is a maximum rate of income tax of 50 per cent. This would encourage private saving — and would reduce the attractiveness of pension policies. Apart from helping to revive the independent business sector it could save Mr Davenport from worrying about the size of the institutional funds.
Colin Dauris Chairman — Legislation Committee The Association of Independent Businesses Europe House, World Trade Centre, London El
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