Leave My Pie Alone!

In the way I used to go bed on Christmas Eve and think “Oh Santa please be good to me!”, I went to bed last Tuesday night thinking “Oh Mr Chancellor, please be good to me!” Or, more accurately, “Oh Mr Chancellor, please don’t muck with my pensions!”

This was partly inspired by something I mentioned in my last blog, that it wasn’t so long ago that a Chancellor decided you just couldn’t retire and claim a pension at 50 any.more, you’d have to wait until you were 55. Five years onto your working life, at a stroke. If, on Wednesday, the chancellor had announced that he’d decided you now couldn’t claim any pensions until you were sixty, that would so screw up my forward plans I can’t actually bare to think about it.

If there’s one thing I increasingly focus more on than my Isas and investments, it’s me and my wife’s pensions. And you need to because, compared to Isas, pensions are a complicated, maddening, mess of regulations, tax laws, restricted stipulations, sneaky stealth moves and, to be fair, generous loopholes that drive you insane.

As my wife and I approach 55, I’m really starting to think hard about our options. I thought I had devised a simple but cunning plan to transfer some of our ISA savings into a SIPP for my wife in order to grab the twenty percent tax bonus offered by the government for doing so.

I planned maybe a fifty grand deposit to be matched by the twenty percent rebate, which was certainly worth having for making a few mouse clicks. After all, I could invest in the exact same Vanguard 60/40 Lifestyle Fund in the SIPP that I was planning in the ISA anyway.

That was Stage One of the plan. Stage Two was that she would then draw around ten grand a year from the SIPP tax free over the next five years. When she reached sixty, she could then access her NHS pensions, at her “Normal Pensionable Age” and therefore maxing the benefit over time. Ya beauty. Simple, elegant and straightforward, eh?

Not a bit of it. First restriction: it turns out my wife can’t deposit more in a SIPP than she actually earns in a year. Which is nowhere near fifty grand, more like fifteen. And she can’t deposit fifteen either, because her current work pension deposits also count toward that fifteen limit. And the fifteen includes the tax rebate too.

Okay, not as straightforward as I thought, but nothing that my ‘O” level arithmetic and a bit of research can’t handle. With some quick moves, I can deposit into the SIPP this tax year, next tax year and the tax year after that – it’s not the fifty grand total I planned, but it’s close. Except, it turns out, it’s not that simple! If she gives up work on her 55th bIrthday then she’ll only have worked eight months in that tax year, and therefore her earnings and contributions have to be adjusted down accordingly. FFS. More research, more arithmetic.

Then I have my own pension to worry about. Have you heard of the LTA? Given you’re reading a blog like this you probably will have and you better start trying to focus on whether or not it applies to you – because it probably will.

The LTA is basically the amount you can have in all your pension pots before the government taxes the excess at fifty five percent. Fifty five percent!!!! Rod Stewart emigrated to avoid tax bands like these and by no stretch of any imagination in any direction – money, hair, leggy blonde birds – am I Rod Stewart. But I am in danger of exceeding the current LTA on my pensions. Or I think I am. “Think” because about six weeks ago I wrote to Aon Hewitt asking them to give me a cash equivalent figure on the pot that will fund a defined benefit pension that I have. I’m still frigging waiting on a response, despite calling them, writing via snail mail and chewing my nails that the chancellor would reduce the limit again in the current budget.

No doubt you’d be able to claim some sort of protection against such cuts, and maybe people were given a few years to get their head around the fact that they couldn’t retire at fifty any more. It’s not the first time that the LTA has been reduced, and each time you have had an option to apply for protection on your funds against the allowance being cut again. I wonder what percentage of the population have done so? Two percent? With the rest grazing on the grass contentedly, like sheep waiting to be fleeced by HMRC.

Honestly, when I see what has happened over university tuition fees, I think the Chancellor could pretty much do what he wants on pensions if all he took notice of was the general public. If he decided to tax all pots greater than 250k at seventy percent, the general population would ask, “Yeah, but did you see Kim Kardashian on telly last night?”  The only reason he even thinks about the consequences of such moves are because The City wants more coming into their coffers rather than less. They want people in pensions so that they can rake in more on fees. Any moves that have people looking elsewhere, like putting their cash under a mattress, or even worse, putting it into those upstart P2P funds, need to be stomped on at birth. Who wants more cash from your pension pot, the Government or The City? Probably the Government wants it more but The City won’t let them have it, not in any straightforward way. Hence the labyrinth of rules and regulations you need to get your head around to protect yourself or, even worse, try and make some sensible financial moves to benefit yourself when it comes to your life savings. Oh yes, they want to encourage you to provide for yourself in the older years, but only if they can take a slice of your pie on the way through. It’s up to you to make sure that slice is as small as possible.

 

11 thoughts on “Leave My Pie Alone!

  1. I thought this was going to be a post about what you ate for Pie Day yesterday (3.14 as they write it over the other side of the pond). Surely not a coincidence?

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  2. I think the rules for your wife’s SIPP are sensible enough. In some ways they are generous, as she gets tax relief on £15k but only paid tax on £4k after personal allowance (I did that this year). Pensions are meant to be personal, not for cross-subsidy between couples.

    The nightmare is reducing the 10 year gap between SPA and pension age. Many other changes to pensions, like SPA itself and allowances are very noticeable and politically hard, but the big worry is that reducing the gap to 5 years would hit the few FIRE people very hard, but no-one else would care. My modelling is robust to a 60 access age, but it would be painful. Did you respond to the SPA consultation saying this, like I did?

    The lifetime allowance is stupid, as its unpredictable and punishes success. Its meant to be inflation linked, but I suspect that will be conveniently forgotten.

    So while in past years I prayed for salary sacrifice to be kept in each budget, now I pray for the 10 year gap. Only having a £225 dividend hit is quite a relief.

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  3. Not as up to speed as I should be, but I thought that the contribution of a DB scheme to your use of the lifetime allowance was 20x the pension, rather than the cash equivalent – unless you are actually transferring to a SIPP for example? The 20x was always a positive for those with an RPI linked, with spouses pension DB scheme.

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  4. Ironic that you complain about having to pay any tax from the lifetime allowance on your own pension while scheming to take someone else’s tax payments as SIpp credit when applying for a pension in your wife’s name

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    • Nothing ironic about moaning about tax one has to pay, whilst at the same time doing everything in ones power to pay as little as is humanly possible. Its standard practice across the known universe.

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    • My wife has worked all our married life and her salary has helped us to save. Although I’m arranging and managing our pension funds, one way of looking at it this is that all I’m doing is investing some of her money in a tax efficient way, as we’re encouraged to do. It’s hard for me to distinguish what is “her” money versus what is “mine”. And, if she divorces me, she gets half of “my” pension pots because it’s only fair. So I’m told.

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  5. @Neverland – where household finances are interlinked (e.g. married couples) I don’t think it’s as as clear cut as saying this as an abuse of the system, as suggested by use of “scheming to take…”.
    What if, due to earning substantially more than his wife, SHMD paid 100% of household bills and gave his wife a regular allowance from his own salary – would it then be acceptable for her to pay her full £15k earnings into her pension? The end result is the same as what’s he’s trying to achieve.

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  6. The most important thing is to keep the taxes to a minimum (legally!) wherever possible. The LTA is absolutely nuts IMO – especially now they have reduced the amount you can put into a pension per year to between £40k and £10k (for people earning over £210k). Far better to limit the amount you can put in and let the growth do whatever it does and let people not rely on the state.
    Making pensions this confusing only puts people off saving for retirement.

    I do worry about my pension arrangements – I will hit the current LTA and I wont be able to touch it when I want to retire now, so I need ISAs and any other method I can, however I will still flood my pension as much as possible due to tax relief.

    I was happy that they didnt touch pensions this time, but lets see if they hold on to it – they need to encourage everyone to save. Why do the “rich” get the tax breaks? They are the ones who save, invest and understand it, not spend every penny on cable tv and prosecco to watch the bloody kardashians (disclaimer: I have never watched, nor intend to watch, that show so I have no idea what it is actually about other than making a bunch of brainless kids want to replicate whatever it is they do!)

    Cheers,
    FiL

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