You have probably heard of Mad Max – its latest incarnation is currently in UK cinemas. You may have heard about the Lifetime Allowance – which has been part of the pension vocabulary since 2006 or “A-Day”. Suffice to say that I believe that the Lifetime Allowance is rather mad.
In the event that you are a politician and reading this, may I ask why you think pensions are important? To my mind, pensions should be encouraged. The end result of a pension should be that people living in the UK are able to provide for themselves above the State Pension, so support their lifestyle. This has several obvious benefits – creating financially independent adults, not requiring State support. Having income means that income tax can be levied and collected to help pay for our society. Let’s also not forget that income is there for using (spending) which enables trade to occur and wealth to be created and so on.
A World of Plenty?
It would seem that politicians generally think not having a rising burden on the State is a good thing. Indeed encouraging pensions with tax relief is the “sweetener” or “bait”. Much like the film Mad Max, we probably don’t want to create a society reliant upon the occassional benevolence of the prevailing “Lord”. Surely we would like a society where all prosper? OK we know the UK has limited resources, so adjust the tax relief, but don’t make it hard or even pointless to save. Even the current regime isn’t tempting enough for millions of people that don’t or cannot save for their future.
At present pension contributions are restricted, which seems fair enough, but the amount that the pension pot grows to is also restricted by the Lifetime Allowance. This is currently £1.25million, which sounds like a reasonable sum, but in practice isn’t as much as you’d like to think, given that it has to last for the remainder of your life. The Lifetime Allowance has already reduced over the years from £1.8m and if the Chancellor does what he suggested he would in the last Budget, it is likely to shrink to £1.0m next April. In other words £250,000 of the Lifetime Allowance will be lost – or more accurately invoke a tax penalty of £137,500.
Mad Max and Excess Tax
If the Lifetime Allowance is exceeded, there is a tax charge of 55% on the excess. OK there are some ways that you can protect your higher pre-legislation allowance, but these are designed by bureacrats and “problematic” to say the least. Essentially this excess tax charge punishes those that save or get good investment results…. let’s not forget that the income from pensions is subject to income tax anyway. So I fail to understand why we don’t simply abolish the Lifetime Allowance and all the protections that have surrounded it. Your pension fund should be just that – a pot that you can actually use with confidence.
Mad Max – Fury Road is currently in UK cinemas, starring Charlize Theron, Tom Hardy and Nicholas Hoult. The Chancellor, George Osborne has his next Budget on 8th July 2015…
When the Chancellor announced the abolition of the requirement for most people to buy an annuity with their pension fund, it was somewhat unexpected. Arguably it was one of the most radical shake ups to pensions in decades. However as time progresses, the wisdom of allowing people to do whatever they want with their own money is experiencing some problems. If you are taking your pension, you need to beware of tax.
The main advantage of pensions is tax relief. At the moment (who knows if things will change in the Chancellors budget next month). Currently most investors will receive tax releif of 20% higher rate taxpayers get 40% – though the difference has to be claimed via self-assessment tax returns, not granted automatically.
Money in a pension has tax advantages
Whilst invested as a pension, the funds are free from income tax and capital gains tax – which means that they grow faster (free from tax). If you take money from a pension, (possible from age 55) 25% of the fund is tax free and the balance when taken as income (regular, ad hoc or all at once) is taxed at your highest rate of income tax. On death the new rules mean the pension fund can pass to the estate without inheritance tax.
Taking money doesn’t have to be taxing
It would appear that due presumably to a belief that pensions are “bad” some people have been rushing to withdraw their pension in entirety, which of course results in a signficant income tax bill and the realisation that once its gone… well, it’s gone. The media initially joked about people buying a Lamborghini and the prospect of access to wealth attracting the wrong sort of attention. For those that don’t spend the money all at once it means that they seek other ways to use the money to generate income to support a lifestyle…. which means investing it. See my earlier post about this.
Most alternatives are subject to tax
Investments are subject to income tax, inheritance tax and capital gains tax…. with a few exceptions such as ISAs – but with limits on the amount that can be invested each tax year. Other tax favourable investments tend to be much more “entrepreneurial” in flavour – EIS, SEIS, VCT for example, most of which carry significantly higher risk due to a small focus on shares in a single company or a very small number of companies.
So be careful – get advice, there is much to consider. Pensions aren’t “bad” in fact they can be really rather good if set up properly. The issue is really to ensure that your pension (which is just a term for income in retirement) suits your planned lifestyle….
Have you heard about pensions freedom? Are you approaching retirement and thinking that this is excellent news, you can have your entire pension? Well you are right, but as ever there is a catch. You are free to self-destruct, it is your right to do so (and I’m not being patronising).
On the one hand freedom is good right? but with it comes responsibility (why do I sound like a Spiderman scriptwriter). By responsibility I mean, once you spend it, whether thats taking it as a lump sum or buyng an annuity or leaving it as a Flexible Access Drawdown pension, once it has gone – that’s it. Nothing left… except any other pension income you may have such as the State pension.
So this is all about knowing what you have and what you need. Something that no British Government has ever managed to get right for themselves, yet here we are, with new freedoms. So you have to figure out how long you will live to work out how much you can afford to take out each year. Actually rather more than that, you have to predict future inflation rates, mortality rates, investment returns and tax rates…. to name a few “elements”. Of course you could get a financial planner like me to help by doing some cashflow modelling and explaining the options and reviewing progress regularly or you could do it yourself.
Today I learned about a term called the IKEA effect. This is when we place a disproportianately high value on something that has been partially made us. Go on look it up. This is precisely what happens to DIY investors… that portfolio I built, its not bad. Actually the truth is rather different. I mean no disprect to IKEA or DIY investors. This is about a price-point in the market – what you can afford. Arguably you will have to live with both (furniture and your DIY portfolio) but your portfolio has to last your lifetime. I’m all for consumer empowerment and the removal of elist jargon and ivory towers, but information is not the same as experience or indeed knowledge. I wonder if you remember the John West tinned fish TV adverts? its the fish that John West rejects that make them the best. In other words, selection, some might call it curation – is vital.
Building the right portfolio to last for life is a fairly daunting challenge, for a few this isn’t going to be much of a problem, but for the vast majority of people it will be. Most people do not pay attention to the holdings in their ISAs or pensions. Most are in the funds or more likely single fund, that the adviser put them in when they started their pension. Little attention has been paid to assessing the level of contributions needed, frankly its more like lucky dip… and who can blame them! the jargon is a huge barrier, statements are fairly unclear and the rules keep changing, little wonder people don’t spend much time looking after one of their largest assets. Yet suddenly at the point of retirement, they are expecting to become investment experts. Whilst the Government may say that people should be trusted with their own money, thats fine if it relates to the straight-forward stuff of running a budget and basic banking, but when it comes to understanding asset allocation, volatility, sequencing risk, safe withdrawal rates, reductions in yield… well frankly its taxing even for the experts. Your pension is not a shelving unit from IKEA, its more like fitting a pace-maker, one that has to keep you going.
My advice is to get advice – don’t get sucked into short-term thinking and getting some degree of satisfaction from raiding your pension to show your displeasure with the pension company. Certainly there are better pensions, but you really need to get sensible advice to explore your options properly. You wouldn’t build a house without architectural plans (I hope)… the same is true when it comes to designing a portfolio for life.
Here in the UK we have some gun crime, its horrible, but it is still thankfully rare. In North America the obession with guns is perplexing, the rising death toll and increasing militarisation of police forces is alarming. We have seen further mishandling and stereotyping lead to deaths in police custody and now further riots in some American cities. I’m not anti-police, I am anti-stupidity and I don’t think I’m telling you anything you don’t already know. America has almost no gun control, you can wander into a gun store or general department store (heck, sometimes they even give them away for opening a bank account -see Bowling for Columbine) and buy a firearm and ammunition. No real checks. We tend to think this is insane.
Yet here in the UK we have an equally perplexing situation which has collectively blind-sided most people. Its in the form of pension advice. Yes that rather dull topic (believe me I know how dull). Anyway it seems that your neighbour – the one that’s tempted by all those offers of too good to be true (because it isn’t true) high investment returns is wreaking havoc with the rest of us, like a loaded gun.
Garbage in, garbage out..
Despite warnings from the regulator, or there being a regulator, believe it or not, there are some “advisers” out there peddling all sorts of… well…”junk”. These always promise high returns, but actually pay high commission (something that is meant to be banned). So I can only assume that the person that does this is greedy, gullable or vulnerable. If the latter, then they have my sympathy and support, but those that are gullable, well it may sound harsh, but at some point in life you have to take some responsibility for your actions. As for the greedy… why should the rest of us pay for your gambling habit? eh?
Back to the gun analogy. Say I am a shop keeper, I don’t sell guns, in fact I sell books, but the guy nextdoor does. Guess what? his customer went on a rampage in the mall and shot 60 people. Being a shopkeeper I am sent a bill for compensation because I am a shop keeper.
What do I mean? Well pensions are regulated products and in theory should be arranged by regulated advisers. However in some products (SIPPs – Self Invested Personal Pensions) you can hold “uncoventional” funds… or what I might call “stuff you shouldn’t ever touch”. The regulator (FCA) would call this “non-mainstream funds” and in fact categorise them as “unregulated” in other words not regulated and therefore not actually protected by compensation. However because they were bought through a SIPP (regulated) and arranged by an adviser (regulated) therefore when it predictably goes wrong (it will) anyone that is an adviser gets to pay for the compensation. Now I don’t know about you, but I thought being an adult involved taking responsibility for your actions, so being one, I don’t sue people every time decisions I take don’t work out right.
Yes inflation is 0% but fees increase 75%
I tell you this because on top of a £20million levy a few days ago in March, the new annual levy has been set, increased from last years £57million to £100million for those that arrange pensions (shop keepers). This levy always comes with 30 days to pay (thanks). This is only a fraction of the full regulatory fees that I and other adviser firms have to pay.
Nobody to blame… but the good guys can pay up right?
The pension companies that allowed these investments in their pensions claim “not guilty – the adviser did it”, the regulator claims “We can’t use our product intervention powers on unregulated investments”… so cannot stop the funds being sold (or bought).
Those that sold these things have scuttled off elsewhere, probably to re-emerge in a different guise, leaving the dwindling number of firms (now about 5,300) and advisers (now around 24,000 from about 250,000 20 years ago) to pay the bill. The bill is paid by the firm and is enough to wipeout some firms, meaning that next year….the numbers reduce, so the share of the bill increases. There is only so much “cost” that a small firm can manage before needing to pass this on to their clients. I therefore predict that as a consequence, many advisers will be “forced” to put up their fees… which means you are also coughing up for the greed of your neighbour, because they cannot be bothered to take any responsibility for believing in fairytales…
Sorry to moan, but seriously… this isn’t fair is it? Of course people that have been ripped off need compensating, but seriously, you didnt think investing in a timeshare via your pension was normal did you? Your comments would be very welcome…. perhaps I am missing something, perhaps my entire profession is… in which case I’d like to know so that I have a snowballs chance of improving it.
Retiring Doctors and GPs?
Lately I have found myself between a rock and a hard place when advising my medical clients. Through no fault of their own, many long-serving Consultants are being punished due to poorly thought through rules about the Lifetime Allowance and Annual Allowance. Whilst on the one hand they are “lucky” to have large pension funds, that are by comparison “brilliant” the fault of successive Governments to fail to do their sums is hardly their fault. Indeed if ever there was an appropriate use of the term “moving the goalposts” it is surely fitting for what has happened to public sector pensions, particularly the NHS Pension Scheme, which was revised in 2008 and has now morphed into the 2015 Scheme (from the start of this month).
The changes have meant that members have to guess when they might best retire… in some specialities that is “a challenge”, most have to pay more, work longer and accrue less, whilst, (if reports are to be believed) having to cope with a greater workload, politically motivated “targets” and an under resourced organisation.
As a result of blown 2012 Fixed Protection and further reductions to the Lifetime Allowance, many of those that I work with are somewhat fed up with the powerlessness that they feel in relation to their pension rights. I cannot speak of widespread disatisfaction, but certainly those that I know within the medical community (quite a number) are “cheesed off”. The way benefits are calculated are ludicrously complicated and often mean that extra taxes are payable – through no fault of the doctor – simply by being in the scheme and having an increase in pay which is out of sync with the defined limits. I’m not talking small taxes here – but excess amounts that are deemed to have been paid as income, even though this is not the case in reality (it isn’t paid as income)…
According to the BMA, a poll of over 15,000 GP’s indicated that 34% of them expected to retire within the next 5 years. Statistics out of context can be used to support any argument, so a headline such as this one needs some unpicking.
According to the GMC, there are about 60,000 licensed doctors on the GP Register for the whole of the UK. The GP register has been around since 2006 and requires that all practicing GPs keep their license and records up to date. This figure is for the whole of the UK and does include some possible double-counting as some specialists are GPs and vice versa. In England there are 40,584 GPs and according to data published last month by the Health and Social Care Information Centre (HSCIC), for the first time there are now more practicing female GPs (20,435) than male GPs (19,801). In any event, a suvery of 15,000 is therefore a survey of about 37% of the entire workforce by headcount… which is a significant survey, one might say a very solid survey, certainly when considered as a percentage of the relevant population – unlike the current political polls or those TV adverts for women’s products that claim high rates of satisfaction (so small that it is questionable if the people conducting the survey actually left their office building)… so this survey, unlike some, is rather “worth it”. Of course, not all GPs work full-time, the figures are a headcount, not a precise allocation of full-time GPs, the full-time equivalent number of GPs is 36,920. If trainees and retainers are excluded, then the full-time equivalent is 32,628.
By way of “hard facts” here are some NHS statistics to consider, I have taken these from the HSCIC report, which frankly could make the statistics much clearer… anyway…
1,387,692 Total NHS workforce (1,187,606 FTE)
701,872 are professionally qualified clinical staff (623,050 FTE)… 50.5%
42,733 Consultants (40,443 FTE)…. 3.0% of NHS staff
55,079 Hospital Doctors (53,786 FTE)…. 3.9% of NHS staff
37,078 Managers (35,164 FTE)….2.6%
36,920 General Practitioners (32,628 FTE)… 2.6%
377,191 Nurses, including GP nurses (328,577 FTE)….27.1%
The problems of staffing within GP surgeries looks set to continue and frankly, if politicians contrinue to play havoc with the pensions (Lifetime Allowance and Annual Allowance nonsense) of doctors and nurses, they may well also be considering earlier retirement. Future PM, you have been warned…