Saturday 26 July 2014

Freedom and Choice in UK Pensions : It’s Not All Good News for Responsible UK Personal Pension Holders

As part of the UK Budget 2014 George Osborne briefly announced the next tranche of government pension tinkering.  More detail in the form of the fifty page document entitled Freedom and choice in pensions : government response to the consultation has just been published so let’s briefly look at what I think is the good, the bad and the ugly as far as I'm concerned.

The Good

The Budget included the announcement that from April 2015 pension holders would get unrestricted access to their personal pension savings.  The mainstream media became all excited and started talking about people cashing in the lot and buying Lamborghini’s.  I ignored this nonsense and thought it actually might give responsible people (like myself?) who are saving for their future an intangible benefit so have been keenly waiting for the detail.

I currently have 44% of my wealth tied up in Pension Wrappers as they have the potential to (I say ‘have the potential to’ and not ‘will’ as once you’re in it’s difficult to get out again without punitive taxes and governments are guaranteed to continue to tinker) give me a healthy reduction in tax over my lifetime.  This comes from a few areas:
  • As a Higher Rate taxpayer while working but expecting to be a Basic Rate taxpayer in retirement I’m avoiding 40% tax now in exchange for 20% tax as I start to withdraw from my pension.
  • By salary sacrificing I’m also getting the employee national insurance that would have been paid on the sacrificed amount added into my pension as well as the majority of the 13.8% my employer saves by not having to pay employers national insurance on the scarified amount.
  • Being able to take a 25% tax free lump sum at retirement. 

Reviewing the detail and the intangible benefit looks to still be there.  By being able to take as much as I like I’m thinking I can avoid some government pension tinkering risk during my retirement years.  The idea is to withdraw as much as possible from the pension while keeping all of my ‘earnings’ just below the 40% tax rate.  I’ll live off a portion of this with the rest being saved into my NISA or even shares held outside of tax friendly wrappers where tax is effectively 0% for Basic Rate taxpayers.  This will over time lower the percentage of wealth held in pensions which will reduce the pension tinkering risk while giving all of the other benefits discussed.

The Bad

The Budget also announced that individuals will have access to free impartial face-to-face guidance to help them make the choices that best suit them in retirement.  At a top level this sounds positive so why do I put this in The Bad pot?  For the simple reason that nothing in this life is free.  If the government is going to pay for it then that means that my taxes are going to go up to pay for it.  If the private sector is going to pay for it then it is going to have to be recouped either through a visible or stealth fee.  For me neither sounds attractive.  As it turns out it looks like the government is going to legislate to establish a levy on regulated financial services firms to fund the cost of the guidance service.  It therefore looks like my investment expenses are soon to see a small rise.

The Ugly

The government claims that ‘allowing individuals to access their pension how they wish prevents an opportunity for pension providers to develop new retirement income products that more closely meet the evolving needs for consumers’.  They call it Enabling Innovation.  Now I don’t know about you but every time I hear the words Financial Services and Innovation I think of complexity to ensure plenty of fees are extracted from the investor by stealth.  Instead of preventing it the ‘government is keen to ensure that the new tax system enables this kind of market innovation’.  Why can’t pensions just be simple boring investment wrappers designed to help people save for retirement?

Finally and this is a big one for anyone planning on Early Retirement.  Currently you can access your private pension from age 55.  The new rules will move that from age 55 to 57 in 2028.  After that it will remain 10 years below State Pension age which is of course going to have to continue to rise as life expectancy improves.  I’ve dodged a bullet, as I’ll be 55 in 2027, but of course further changes in the years to come could drag me in.  For anyone younger than me it looks like early retirement just became a little more difficult to achieve as you’ll need more wealth outside of pensions to cover you for those additional years until you can access your pension.

How have the changes affected you?

As always DYOR.


  1. "as life expectancy improves": that's quite an assumption. What about antibiotic-resistant bacteria? It's a problem so serious that even politicians are beginning to notice.

    Or a viral pandemic? The centenary of the start of the Great War means that it'll soon be the centenary of the Spanish Flu.

    Or life-shortening by over-medication? Will unnecessary statination eventually be seen as a cause of premature death, for instance?

    1. Don't forget the chemtrails! And the Morgellons! They'll get us too you know!

  2. Just wondering if there will be any 'special cases' regarding access to your SIPP.
    Would seem stupid if say someone has 2 million tucked away and they can't withdraw say 20k a year because the age of access has just risen to 57 and they have just turned 55.

    At the moment I'm 40 years old with 150k in my SIPP and growing steadily. I'd be inclined to try legal action to get my hands on my funds if I required them when I am 55.

    1. I doubt there will be any 'special cases... it's not that long ago that the minimum age was 50... and got bumped to 55 without ceremony.

  3. Barring unusual circumstances (e.g fatal illness and < 6 months left to live) 'special cases' favouring a weathy (2 million) SIPP owner seem unlikely, to me at least.

    In my opinion, you have raised the biggest risk of all: government meddling. I'm 39 with around 110K in a SIPP, but i am paying a big chunk of my salary into it each month via salary sacrifice. When i get to £200K (around 2.5 years) I will probably stop the additional salaray sacrifice contributions and just accept the tax hit + invest outside the SIPP. 200K compounded at 4% real over 15 years (i.e. to age 57) is about £360K, corresponding to an income (SWR 4%) of about 14.5K/year.

    Alternatively, for an early retiree (say age 45) there is the interesting prospect of starting a 'lifestyle' business which rents commercial property from the SIPP. For an outdoor sports enthusiast like me - perhaps a climbing wall, or an outdoor sports centre. I've not looked into it in any detail. I expect the trustee's charges would be high, and the business still has to pay the rent.

    1. An other 'emergency' option is to simply cash in the pension early and take the 55% tax hit. Sure - it sounds drastic - but bear with me:

      Let's say that you funded the pension via salary sacrifice, and that you avoided the 40% income tax and the 2% NI, and you got all of the employer's NI at 13.8%. That means that you have taked advantage of a 55.8% uplift.

      If you give up the 55% uplift by paying it all back in tax then you end up with the amount that you would have received post tax/NI anyway. Sure, 90K in the hand sounds much less than £200K in the SIPP. However, your 90K is free of government meddling, and you can put it in NISAs and get the income tax free and leave is in your estate when you keel over.

      The calculation is even more favourable if you pay 45% tax, or you have paid extra into the pension to hang onto child benefit payments (approx £1.9K/year for 2 children).


    2. If you'd accepted £100 of pay, you'd have received £58 after income tax and your own NI. Instead you put the £100 into a pension where it is joined by the employer's £13.8, so you now have £113.8. Take off tax at 55% and you are left with £51.21 which is, you will agree, less than £58. So the scheme is dud.

    3. In my case the child benefit (£1,752/year for two children) would help a little. If you sacrifice 30K then that adds £5.84 to your £113.8 = 119.64. After 55% tax = 53.84, which is less that £58. I agree that it would probably be better to take the money as cash in the first place, but the pain is not as great as it initially seems (around 8% in the example above).

      The point i was trying to make is that the generous tax incentives on the way in would (if it were legal - see below) make the 55% on the way out less painful. If the government were to suddenly announce that access to pension cash is possible only at age 70 it would be nice to know that some of the cash can be accessed early, albeit with a tax hit. A bird in the hand, and all that.

      Of course, i am not for one second suggesting that anyone 'liberates' their pension. And I note that Grey Gym Sock (below) reckons it is not possible to do it legally. I thought I could just phone L&G and say 'please can i have my cash - yes I'll take the 55% hit. It seems that this is not the case.

  4. i will be 55 in the same year (2027), and i'm not at all sure that we've dodged the bullet on the minimum age to access a pension. the original consultation document said (at section 3.30, note 7): "The transition to this age will need to begin before 2028 and the government will provide further detail on this in its summary of responses to this consultation". but i can't find this detail in the response. so not sure where we stand!

    even if it was sensible to access a pension early and pay the 55% penalty (which i very much doubt), note that this is against the rules, and reputable pension providers will not allow you to do it. some very disreputable providers will, but they will probably also effectively be helping themselves to a large chunk of your pension pot, so you will not end up 100% minus 55% tax penalty = 45% of it, but much less - perhaps even a negative amount after the tax penalty (which is charged on the whole pot, not just the part you actually received).

    the idea of taking legal action if you don't get access at 55 may be satisfying, but it's not going to work.

    i am quite relaxed about when i get access to my SIPP, because i have only put a small proportion of my investments into it (despite the clear tax advantages). i wouldn't want when i can retire to depend on how future governments change the pension rules.

    retiring before you can access your pension doesn't mean that you need to have sufficient non-pension investment income to live off indefinitely. when you are close to accessing your pension, it can be sustainable to spend some of your accessible capital, knowing that meanwhile your pension pot is growing from reinvested income, and you will have enough overall income when you get access to it.