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?
sex health money death 
The income from a pension (not the tax-free lump sum) is taxable and will be taxed at source just like a salary would be. The pension provider will be given a tax code by HMRC (just like an employer) so income within your personal allowance is still tax-free (and the right amount of tax deducted at source).
Nothing wrong with taking income from a pension and recycling this back into the same pension or another pension (for you or for someone else) – even if that income was within your personal allowance, you will still get at least basic rate tax relief on the contribution (so 0% on the way out, 20% on the way back in). And when you come to draw on the contribution in the future, another tax-free lump sum is available.
However, if you are not earning, you can only contribute £3,600 gross, but if your wife is still earning, her contributions can be anything up to her earnings if higher (ignoring any employer contributions).
There are plenty of financial advisers who are glorified salesmen. But focus on finding an independent financial adviser and there are plenty of extremely good financial advisers out there who make their money by putting your financial best interests first, and who won’t advise when it won’t add value over and above their fee (they exist).
Paying for financial advice is like anything: you can DIY instead if you want to. Maybe you do your tax return without an accountant, do your own plumbing without a plumber, do your own gardening without a gardener. It just comes down to whether you have the time, the inclination and the ability to do a good job of it yourself, and if you can afford to try and get it wrong.
But given the sums of money involved, the complexity of the rules, the difference that even small efficiencies (like pension income recycling above) or inefficiencies can make when compounded over a long period of time, and the potential implications of much larger mistakes to your financial position, there is no shame in getting a professional to do a proper job for you (while you get on with enjoying retirement and not having to worry about pensions).
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Like you, I’m OK with the basics but seek more info and advice on the complicated matters. I came across the Meaningful Money site via another couple – http://ourtour.co.uk/home/the-money-muppet/ – who achieved financial independence in their early 40s and now travel in the motorhome. I’m not endorsing him, nor have I contacted him on a one to one basis, but I just find his podcasts and videos easy to understand: http://meaningfulmoney.tv/
Hope it helps!
Paul
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The reason pensions are so complicated is that the reliefs/tax deferral benefits on offer are so generous
Its rather like all those 100s of broadband/utility deals that are out there
Most people stay on the standard tariff from their old regional utility year after year and get screwed
Some people do their research switch every year and pay much less
Your choice if you want to be a victim
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Well, although you gripe about your English pension, we Yankees have twice the issue. Once for our government social security/corporate pensions (rare these days)/personal retirement savings vehicles (of which there are many) AND THEN AGAIN for medical care.
Be thankful you don’t have to worry about getting a medical insurance plan, figuring out how to pay for it, figuring out if you are covered or not, how much your “co-pay” will be, fighting the insurance company to get them to pay their portion, etc., etc.
P.S. to the guy who wrote “glorified salesman”, that got me laughing! “Glorified”?! Maybe in their own minds and those of the unwitting!
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I think/hope that the change to an ISA style pension tax system has only been delayed til after the EU referendum.
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I’m glad John posted his reply as I was concerned for moment after reading your comment on the income tax situation when claiming a pension. My understanding was it gets taxed at source, yes, but your annual allowance comes into play in the same way as in paid employment so you can get your first £11k P.A. tax free.
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I think this has been mentioned before, but if you posted about your pension issues on the Motley Fool boards you would get some valuable comment I’m sure. Even if you go to an IFA (and I’m sure you could actually work it out yourself tbh) it will help you know what questions to ask.
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I quite agree with you that pensions, and the withdrawing of said pensions, is needlessly complicated. I pay a lot into my pension every year, and I increasingly worry that perhaps I shouldn’t be banking so much on the pension given that seemingly the government can change the rules around pensions at their whim at any point in the future. For me, I’m now trying to re-focus on ISA’s to make sure I have money more in my control, as well as the money I already have in my pension. I’m not abandoning pension saving, rather I’m trying to spread my risk across different investment types.
I hope you manage to find some clarity and direction for your situation. I personally use St. James Place for my pension. I’m most likely paying over the odds in terms of fees, but I do really like the fact that my personal advisor meets with me at least twice a year and helps me with all of my questions, no matter how stupid I think they are. Plus they really turned my parents’ pension situation around for the better when they only had about 5-10 yrs left until retirement – for which I will always be grateful.
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