Last week, the chancellor made a U-turn on pensions. Well, this was news to me. I mean, what road was he on? The way it was reported in the media it was as if Gideon had announced a concrete proposal to switch pensions to an ISA style arrangement where you’d pay the tax at the point of investing, not when you came to take it out. But this was never announced, was it? He was, at best, considering this option, but we never really knew how close to a decision he’d come. The way it was reported last week, it was as if an ISA pension system was a done deal. As ever though, when it comes to personal finance, we’re not given a foregone conclusion, we’re given a foregone confusion.
When it comes to saving and investing, I like to think I’m well on top of the fundamentals. I’m certainly no numbers geek, and many of the investment articles I read that seem to delight in digging into investment ratios and projections go straight over my head. I focus on the very basic basics, but I’m still often blindsided by information that I feel is “a basic” but that I’ve been unaware of. This time it happened on pensions, when I read that your pension, once you begin to draw it, is actually taxed at source.
Up until this point I was telling myself that I had at least three years to research and develop some decent strategies to minimise the tax on my pension income. Obviously I’d take the tax free lump sum and then maybe only draw down an income of less than £10k a year while I spent my way through the pot of tax free money. I assumed that if I kept within the personal allowance limit, then I’d not be taxed on that £10k income. But now it seems that I will be.
My next half-thought-through strategy was to take my projected annual pension income and stick it into a personal pension for my wife, meaning she will then benefit from twenty percent tax relief upon it. So the government takes twenty percent from me on the one hand and she gets it back on the other. It’s a bit of a paper exercise though, because she’ll subsequently be taxed on that eventually too (apart from the lump sum element) when she comes to withdraw it. I suppose it might also grow if we kept it invested for five years, so there’s a bit of an upside there. How much to put in though? What if she’s still working? For how long should I do it? What if things change for the worse over those years and the tax burden on withdrawing pensions becomes even greater?
I have to admit though, I’m already losing the will to live as I write this stuff down. Why is it all so complicated? Why do I feel that I’m going to have to go and get professional advice, for a probably ridiculous fee, on finding a tax efficient way to withdraw my own money that I’ve saved hard for over the years? I know all the information I need is probably “out there” on the web, but I don’t trust myself to find the right stuff that applies to my exact situation. Over the years I’ve put a lot of money into pensions and never really thought hard about the tax implications on the basis that I had plenty of time to worry about that when it came. Well, that time is coming, and I now find myself wishing that maybe I’d stuck more of my money into ISA’s instead, because that is so easy to understand. The money I’ve saved in ISA’s is what it is: all mine, tax free, no questions asked. Simple. I can plan fairly effortlessly on my ISA’s. Increasingly I feel I can’t plan on my pensions at all without expending a lot of mental energy on something that I might never fully understand. Despite the fact that getting good tax advice might save me thousands of pounds going forward, my heart sinks at the prospect of it. After all, I’ve never met a Financial Adviser who I thought would put my financial interests before his own, and I know I’ll be giving myself a hard time for not doing the work to understand the situation myself. It’s a double whammy: “I’m thick, and it’s costing me money”.
Although any change to an ISA style pension probably wouldn’t have affected me all that much at my age, I can see the attraction in it. Surely it cannot possibly be as complex as the situation we currently have? As I near pensionable age, the one thing I want is stability. All the conjecture about change is unsettling, and at the same time the press reported the “U-turn” on the ISA proposal, many took the opportunity to ponder all the other alterations and tweaks that might be pushed through regardless. “Change is going to come and it probably won’t be for the better”, was the message. Mind you, isn’t it always?