I was reading an article on the dreaded Brexit the other day – it’s still hard to read anything that doesn’t refer to it – about the hotly disputed claims over the amount of weekly money going to Brussels that could go the NHS. Cutting through the chaff and spin, the main point was that those Big Bad Brexiteers quoted a gross figure, not net.
Well, the last time you quoted your salary, or an employer quoted one to you, what figure was used? Gross or Net? Daft question, isn’t it? On salaries, everyone quotes gross. In this way, a gross number has some sort of legitimacy and credibility, even if it has a long distance relationship with the “bottom line”.
When I stop working I won’t have a salary of course, but I will have a pension, including one from the State which is probably going to be around £8,000 a year. But – is that gross or net? That depends on (a) what other pensions and income I’m taking and (b) how I choose to look at it. Worst case scenario, the government will give me £8,000 with one hand and then take 40% of it back with the other. In a real horror scenario, they might take 55% of it back (as I understand it) although that could be quite a nice problem to have as your pension pot will then be north of a million quid.
The subject of pensions and taxation is one that lingers on the periphery of many dialogues I have with myself on retirement income. It’s on the periphery because I often just don’t allow it in to the inner circle of my calculations on the basis that it’s an uninvited guest who I may, or may not, ask to join the party. However, if I cannot totally exclude the taxman from the party, I assume I will be doing everything to minimise his presence. It’s just that I’ve not yet really dug into the detail of how I do that.
I once constructed a spreadsheet that did factor in the knowledge I thought I had about the tax situation in retirement for both my wife and myself. It soon became an unwieldy, over-formatted monster that included so many “ifs and buts” it threatened to crash my computer. Needless to say, I haven’t opened it since I thought I’d finished it. Instead, exhausted by scenario planning, I told myself, “Keep it simple”. Stick to the big things you do know and, if you have those correct, you’ll not make any massive mistakes.
What do I think I know about tax and pensions? Firstly, the big tax free bonus that applies to me is that I can currently take 25% of any pension pot tax free when I hit 55. For my Direct Contribution pension that’s a simple calculation. Secondly, when it comes to income tax, both myself and my wife can withdraw up to £11,850 a year tax free which, when you tell yourself that’s a net number, is quite a substantial amount. What gross salary would you have to earn to take home, after tax and NI, an income of £23,700 a year? I can’t be bothered doing that calculation (because I’m frightened I will get it wrong) but it must be close to thirty grand, which is above the national average wage. Anything you add on top of that is cream on the cake, taxed or not.
Perhaps, if I left things at that, then I’d have a much more relaxed and stress free life. Unfortunately that’s not the way I’m made and, I think, I didn’t get where I am today by letting my money take care of itself. You have to work on your cash to ensure it’s working for you. Plus there’s the whole question of getting value for money when you spend it – after all, isn’t that why we work to earn it? At some point you have to choose to spend and, when I do, I want to ensure I gain maximum value at the point of withdrawal to give maximum value at the point of purchase. (I also give myself a hard time about mulling over “First World Problems” like these, but that doesn’t change anything except my mood and level of guilt).
I’ve already become lost in various forum threads that try to answer the question of how best to withdraw retirement funds in a tax efficient way. There are a lot of strategies because just about everyone has a different set of circumstances that apply to them. In a way, it reminds me of those examples newspapers always run post-Budget that take a variety of households and calculate “Here’s how the budget will affect you”. In all the years of reading them, I’ve yet to find one that actually applies, a hundred percent, to me.
As ever, when it comes to personal finance, a good outcome will probably be related to the amount of work put in. I could pay a professional to give me some pointers but, with those fees running into potentially thousands of pounds, I doubt I’m ever going to do that.
It would be easier, and possibly saner, to just plan to live on £23,000 a year net, with any excess sitting there as an “Emergency” or “Fun Fund” to be called on as necessary. In a lot of ways, I really like this idea. It’s really simple. I just can’t shake the feeling that it’s also really dumb, as I worked hard to save the money that I’ve accumulated, telling myself that one day I’d be able to enjoy it. I just don’t think it’s a sensible option now to sit and watch the pile grow. For what?
So, in lieu of any other great ideas, it’s back to the financial grindstone of the forums and blogs, and the never-ending debate about what to do for the best.