Saturday 5 March 2016

Another pension’s consultation begins just as the last consultation ends

There were plenty of articles in the mainstream media this week musing about the potential changes that were coming to private pension’s in this month’s budget.  Would Osborne introduce a pension’s ISA, would he introduce flat relief on pension contributions, would he abolish salary sacrifice or would he just cut allowances?  As is so often the case with budget’s these days it looks like we don’t have to wait until budget day for the answer.  Osborne has apparently decided that “There won’t be any changes to tax relief at all in the Budget” (free FT link or Google Osborne scraps pension tax relief shake-up).  So it looks like for now I can just continue with Plan A which predicted no pension tax changes for ‘high earners’ in the 2016/17 tax year.

While all these articles were getting attention it was actually this article (free FT link or Google State pension review begins with John Cridland as head) that has had me more concerned.  This was the announcement that another review of state pension ages has kicked off, from which recommendations will be made in May 2017.  ‘Experts’ are predicting that millennials joining the workforce today might be waiting until their mid-70’s before they can retire.

Now for me it’s not the potential state pension age change itself that worries me, as all my FIRE (financially independent retired early) planning never includes the state pension.  This is because I never wanted to be held to retirement age gun-point by our ever tinkering government with any state pension I might (I actually believe I may never receive any as for example it will end up means tested) receive being an insurance policy only.

So if increasing the state pension age is not going to destroy my FIRE plans what am I actually concerned about?  In short the link between state pension age and the age at which you can start to access your private pension which came out of the previous Freedom and choice in pensions consultation. The key clause in this document is:

2.36 The government believes that increasing the minimum pension age meets the guiding principle of fairness and reflects changing expectations of how long people will remain in work and in retirement. The government confirms, therefore, that it will increase the minimum pension age from 55 to 57 in 2028. It will remain 10 years below State Pension age thereafter.

It’s the last sentence that has my attention.  So if state pension age were pushed out to 75 I might not be able to access my private pension until 65.  This would mean I need more wealth outside of pension wrappers than I'm currently planning to have 1 year hence, which is based on a private pension access age of 55.  The only thing that makes me breath a little easier is that I’ll be 55 in 2027 and apparently “...Mr Cridland's review would not look at the current pension timetable set by previous governments, which goes up until 2028...”

So for now I think I’ll just continue with Plan A and wait for the inevitable information leaks.  The only slight concern is that I don’t trust a word of what they say, the consultation is not published until May 2017 and I’ll hopefully be FIRE’d in February 2017 so will be done before the word is out.

Why can’t our fabulous government just set some rules, stop tinkering and let us implement long term planning around those rules.  This continuous tinkering really is getting quite tiring...

As always DYOR.


  1. Its a worry for me too, on a similar track, but 4 years older. I'll keep an eye out for any consultation exercise (
    as when I commented on the one 2 years ago I noticed how few people had done so, so I felt my opinions had more weight than say, writing to my MP.

    I'd be concerned that they'd find it only politically possible to change state pension age gradually, but could change the 10 year gap to 5 instantly, with many fewer complaints.

    7 years to go...

  2. Even though I've organised myself to be a basic rate tax payer, and could have benefited from a set rate of tax relief for all, I'm relieved that nothing will change (for now). Just for the fact that Osborne has taken some well heeded advice, and decided not to mess with pensions. It's beyond tiresome.

    I'm 55 in 2024, so shouldn't need to make a dash and a fast forward roll under the closing portcullis like you will. You'd hope anyway. I've decided to park my private pension until NRA at 65 anyway, and am front running that with a SIPP I'll take at 55, and will take precautionary measures to front run that as well to counter any tinkering. I'm thinking of the rapid acceleration of state pension age for 1950's born women, so anything is possible.

    8 years to go...

  3. Absolutely agree RIT.

    The Government's constant meddling and fiddling with pensions is infuriating, and ultimately counter-productive, since they will make pensions much less attractive as a savings vehicle, and hence result in more reliance on the state in old age. Thank goodness Osborne was forced to halt his tinkering this time.

    There was an interesting article by Anthony Hilton in Thursday's Standard which noted that life expectancy has risen much faster than longevity (because of fewer premature deaths at a young age) and that we would be foolish to assume that this will continue to rise at the rate it has in recent decades (driven largely by the huge fall in smoking and better treatment of disease in young people).

    Frankly, although I can see the rationale for rises in the state pension age, it is disingenuous to justify the same for private pensions which are paid for by the earnings or contributions of individuals. We can't expect the state in the future to cover as much as it did for the boomers, so rather than attacking private pensions the Government ought to be making these attractive, not less, in order to encourage millennials to save.

  4. This is the best news of the year! No changes in pensions. I can even believe that my personal response to the consultation made some difference...

    I have been planning to replace pension with VCT investments and started investigating options there... Luckily, this is not needed anymore.

  5. Good news indeed, the two red lines for me were loss of 40% tax relief (add in National Insurance savings as well for salary sacrifice) and any attempt to move the access age higher than 55 when I have just under 10 years to go.

    Either of those red lines being crossed would require me to instantly drop SIPP or workplace pensions as a vehicle for reaching FIRE by 55.

  6. Scrapping upfront tax relief on pensions was always going to be a non-starter, politically.

    I think there is more justification for setting just one rate for tax relief - 30% or 33% which would incentivise basic rate tax payers.

    We are all living longer so there needed to be some changes to the starting age but there are wide variations around the country - the average here 'up north' and also Scotland for eg is much lower than the south east.

    Also no account is taken of years worked - someone leaving school at 16 gets the same as someone starting work after university and gap year at 23.

    Maybe a little more 'tinkering' is needed to make the system a bit fairer but once done it should be left alone for at least the next 20 yrs.

  7. Many media commentators have missed the effect that scrapping salary sacrifice would have on pension tax relief for employees.

    For basic rate taxpayers, salary sacrifice transforms a 20% tax relief into a 32% tax relief (because you are getting relief on both National Insurance and Income Tax). For higher rate taxpayers salary sacrifice makes only a small difference (because the marginal NI rate is just 2%). So if Osborne got rid of salary sacrifice he would need to set a single rate of relief at least at 32% otherwise many basic rate taxpayers would be worse off as well as higher rate. So the talk about fairness is a smokescreen for what was actually looking like a substantial attack on pensions.

  8. HMG and Treasury have to deal with the fact that the State Pension is unfunded. Hence - a sustainable ability to maintain these benefits depends on future contributions each year being able to meet the future demands . The population demographics are " against them " here - life expectancy is rising so people are spending much longer in retirement - when they have stopped contributing to N.I. and are paying less tax than when they were working . At least HMG are trying to look a long way into the future to try and tackle parts of this issue and are trying to increase or at least improve the proportion of contributors to beneficiaries (C to B's).
    I don't think that how well off people are going to be in their retirement is a primary consideration - it is more driven by long term affordability.
    All of the above is fairly "obvious "

    However - there is an important aspect that I think is not being mentioned ( probably for obvious reasons ). By making people work longer before drawing their pension(s) and thereby trying to improve the C to B ratio -no mention is being made on the effect on life expectancy of people having to work until they are older .

    To be frank - the shocking truth is that from HMG's point of view their finances would look a lot better if everyone worked until their retirement age - and then dropped dead. That way they have a massively beneficial C to B ratio.

    This may sound preposterous - but by making it much more difficult to retire and take a pension at an age young enough to be able to enjoy a long and healthy retirement - they are condemning many to an earlier death , and a less healthy retirement as well .

    To me - it seems that the finances are driving these decisions - and public health / socio-economic /actuarial statistics and demographic factors are all taking a back seat .

  9. To be able to maintain some choice in selecting when YOU want to retire you will need to have access to ( preferably tax free ) non-pension based sources of income. ISA's already have no liability to income or CGT taxes ( and would it not be wonderful if they became IHT exempt too ! ). We all have an annual CGT allowance - and now can earn £5K dividend income tax free as well, and Gilts are CGT free also.

    Financial planning for the future and for retirement is becoming more difficult ( as there are many more choices other than pensions - the income from which is taxed )

    What every individual needs to know is : the age that they are going to die . If you were to know that - the planning would be a lot more straightforward . It would also be helpful to know what your state of health is going to be like prior to your death - ie are you likely to need long term residential or nursing home care - as they can consume a very large amount of your income and capital - if not all of it - before you die.

    1. Great post stringvest. For me pensions do provide benefit as I have a high tax rate now and expect to have a low tax rate in retirement so I have to try and maximise their use without going to far. Of course I need to then balance this with:
      - government tinkering risk including age goal post movement; and
      - the funding period between between early retirement and private pension access age.

      I've been conscious of this for a few years so hopefully have a reasonable balance. As of today I have:
      - 44.0% in pensions
      - 11.7% in NS&I ILSC's which are tax free
      - 11.1% in S&S ISA's which as you say are tax free
      - 33.2% in non tax sheltered investments

      The last one is my problem and comes because of my high savings rate over the past few years. I won't put more into the pension for the reasons of this whole post and I need to also bridge the FIRE to private pension age gap. ILSC's are no longer available but for now I keep rolling over what I have. I'm filling my ISA allowance every year so that door is closed. So without getting into VCT's etc I'm a bit stuck. I sleep reasonably easy over the big taxes I'm paying here though because I know it's not going to be for much longer.

      Agree with you on the advantage of knowing when your going to die financially. From an emotional perspective I'm not sure I want to know it though...

    2. After FIRE you should have time ( ie years ) enough to gradually switch your non tax sheltered S&S holdings into tax sheltered ISA's - by using up your annual CGT allowance to release cash which can then fund your new tax year ISA contribution. But expenses may be a factor here - as holdings within an ISA wrapper may be more expensive than ex-ISA . The tax free dividend annual allowance of £5K is now generous but NB - there is still the advantage that ISA's are CGT free as well . In a strong equity market- despite using up your annual CGT allowance -you may find that you are building up increasing capital gains within your ex-ISA holdings . The main disadvantage of this is that your S&S holdings become relatively inaccessible and also
      " stuck " as your ability to sell holdings to rebalance your portfolio will be hampered by potential CGT charges on any sale once you have used up your annual CGT allowance.

    3. Unfortunately it's unlikely I'll be able to play that card. A move to The Med will remove any concept of ISA's with me coming under a combination of that countries tax laws and the Double Taxation Conventions between the UK and the chosen country. My ISA dividends will then become taxed at somewhere between 0% and up to 25% depending on country chosen.

    4. "The tax free dividend annual allowance of £5K is now generous". Its not really generous, the old tax credit system meant basic rate payers paid no tax on any level of dividends, now they will pay 7.5% on any beyond £5k, so its a tax hike.

      You can use any unused fraction of your personal allowance, so the first £15k are tax free if you're not working.

    5. Hi RIT,

      I find your 6/3/16 @ 17:35 post revealing . There seems an obvious incongruity between the detail that you currently apply to your financial planning and investments - with the uncertainties that you are going to face after FIRE. That suggests to me that you should be spending a lot more of your energy making some plans for what is going to happen post FIRE - rather than all the energy and attention you are putting into achieving FIRE.
      Continuing on that theme - it also seems incongruous to me that you have committed to triggering FIRE at a fixed financial sum - particularly in the light of not even knowing where you are going to be living or what tax regime you will be having to work with .

      And then of course there is the actual date of the triggering . Are you really serious - thinking about your 27th Feb 23:27 comment " as soon as my Saturday financial update shows £1m. a resignation letter will be presented the following Monday "
      This seems a very strange way for you to be making such an important decision - especially considering the current degree of control that you exert on your situation .
      I think your whole concept and drive towards FIRE has become an " overvalued idea ". Look this up - you may disagree - but I think it may give you food for thought .
      Can I suggest that you actually face reality and rather than rely on a Saturday valuation you actually fix a date to work towards.

      In ? Feb 2015 you predicted FIRE in another 18 months
      In Feb 2016 you predict FIRE in another 12 months .
      At that rate - in Feb 2017 you will be predicting FIRE in about 6 months - so why don't you just fix the end of Dec.2017 as a suitable date to work towards. At least that will take the pressure off you - wondering if next Saturday you will be pulling the FIRE trigger. In my view it will also require you to pay more attention towards your post-FIRE life - something that I think is dangerously lacking - and I have mentioned this a few times already in previous comments.

      AND - you can stop the blog anytime that you want - so you should not feel pressured into HAVING to keep it going whatever . It would be missed by many - but the rest of your life seems rather more important to me than keeping up the blog.

    6. I really hope RIT doesn't stop the blog once invoking FIRE. I would love to see how things turn out.

    7. I like the £1m decision point, as it avoids the One More Year problem. If an analysis decides that £1m is enough for all but 5% of scenarios, and a 5% risk is acceptable, then its a rational goal. I can't think of another measure of FI so you can commit to RE.

      Many people RE when their job disappears, and they calculate they are FI. Often they could have done it years ago if they had a Saturday check.

      In my case, disliking my job, I'm rather hoping they will challenge my slacking, as it will force my hand and avoid that one more year.

  10. I know that Portugal offers a pretty desirable deal for pensioners: apparently you can draw your pension tax-free. Does Portugal have a minimum age for drawing pensions? Is it reasonably easy and safe to transfer a UK pension to Portugal? If you fancy life on a small island, is Madeira worse than Malta? If you withdrew your pension money in Portugal could you then tuck it away safely in Switzerland?

    1. Portugal is a location that unfortunately I know very little about. I've only been there a couple of times back when I was a consumer on holiday and I don't know why but it just didn't appeal. I much prefer Spain if given the choice between the two.

      Hopefully another reader may have some more information. I believe that they do (did?) have a scheme where a new tax resident could get an income tax free holiday for 10 years, including receiving your pension tax free. I don't know much more as it's not somewhere on my radar.

    2. Perhaps buy a nice motorhome and travel Europe for a year with your family. It is a cheap, enjoyable way to do it, and a good way to see closely how various parts of Europe compare.

    3. Next winter have a week in Madeira to see what you make of it.

  11. I note that RIT explains that he has as much as 11.7% of his capital in NS&I ILSCs; I too have some of these and am sticking with them on 'roll-over' even though the real return is a miniscule 0.05% (above RPI) tax free.

    I am doing this on the basis that the Inflation ogre SHOULD return again (heaven knows enough effort is being put into this outcome).

    Do we all think that these instruments are worth sticking with?

    With thanks for a rational discussion site,

    yours EHB

    1. For a low risk investment for somebody still paying tax then I still can't find any better even in our low inflation environment. What's a good saving rate interest rate these days? 1.5%? With RPI at 1.3% a 40% taxpayer is going backwards to the tune of -0.4% per annum. Makes that real 0.05% tax free look ok.

      The new £1,000/£500/£0 (dependent on income tax rate) tax free savings allowance might swing a savings account into favour for some. So DYOR and all that.

      That said the only reason mine will be sold is to fund an eventual home purchase. Until then they'll just collect dust protecting me from money value erosion.

    2. They are irreplaceable so we roll ours over. Someday we may be very glad that we did.

  12. What a helpful blog you have shared with us.. This is is really very helpful for new comers.I am inspired by your work. I hope you will shared such informative post in future also.