“TEEN-AGE kicks” – incentivising sensible spending in retirement

Teenage 2

“A teenage dream’s so hard to beat..

Just say those words and I’m thinking  1978, radio under the pillow – John Peel show – 11pm.

teenage 3

But I could relive the TEEN- AGE kicks in a few years time, if that crazy maverick Michael Johnson gets his way!

Michael’s latest idea is what he calls TEEN taxation and it’s for those teenagers of the seventies who will be retiring from now on.

Here’s how it works. You pay your Taxes as you put money into your pension  through PAYE  – T

You are Exempt  on your investments between then and the point you start spending your  savings – E

And you get an ENhanced retirement pot at “spending time” if you agree to spend your money in a sensible way – EN.

Now there’s a value judgement in that word “sensible”. It ties in with the Social Market Foundation paper this week which lays out what “sensible” is.

Sensible is not spending all your pot and running out in later years

Sensible is not putting all your money under the bed and “dying loaded”.

Sensible is establishing a plan of action that makes sure that you’re not going to be a burden on another generation of tax-payers.

Teenage kicks

So in practical terms, sensible is insuring against extreme old age, making provision for later life expenses and setting the rate of targeted pension at a reasonable level to sustain it till death do thee part,

Of course- if you are an annuity provider – sensible is providing an annuity. But that need not be the only sensible way to spend your savings. You might set up a plan which does what NEST is suggesting, keeping money in cash to make income payments, investing some in shares for the long term and planning for an annuity purchase when your cognitive faculties desert you quite!

You might, and say this very quietly as this financial heresy, club together with others and form a spending club where your money is pooled to provide protection against extreme old age and an investment strategy that provides economies of scale enhancing the regular income.

All of these ideas seems a sensible strategy and without starting that “in my garden a thousand flowers should bloom” nonsense that so messed up the DA policy, I do think there’s more than one way to skin a cat. There cold be more than one way to get back to  TEEN.

teenage 4

Michael explained this idea at a conference organised by Professional Pensions on the future of pension consulting. Frankly I don’t see it does much for pension consulting – accept reduce the amount of it!

Unless you are going to pay someone to review the level of income you take every year, which most people are reluctant to do- the annuity, the NEST hybrid or the CDC decumulator described above are the alternatives. None of them need a lot of love and attention, they are what Paul Lewis calls “Fire and Forget” strategies.

Of course all of the Fire and Forget strategies need to have some form of flexibility. The NEST strategy gives a bail out option and property rights can be built into the collective decumulator I mention at the end. Even annuities look set to have a second hand value for those who get fed up with their guaranteed income streams.

But Michael’s ENhancement can cope with even that, it would of course be recovered if someone decided to get dippy with their savings and become a tax disincentive to jack a sensible strategy in.

teenage 6

Which might sound a bit recidivist to the lover of pure freedom. But nobody said that the freedom to be feckless was to be encouraged. Right now people pay enormous tax penalties to be a “tax-muppet” and cash in their pension for a “Lamborghini”. If we move to TEE, the disincentive to spend it all at once gets taken away.

TEEN may involve a value judgement on what qualifies for the incentive and what doesn’t , but heh- what are Regulators for?

So I like Michael’s idea, I think it makes TEE responsible and it allows me to sing that song to myself

teenage5

Altogether now…

A teenage dream’s so hard to beat

Every time she walks down the street

Another girl in the neighbourhood

Wish she was mine, she looks so good

I wanna hold her, wanna hold her tight

Get teenage kicks right through the night

I’m gonna call her on the telephone

Have her over cos I’m all alone

I need excitement, oh I need it bad

And it’s the best I’ve ever had

I wanna hold her, wanna hold her tight

Get teenage kicks right through the night

Alright!

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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7 Responses to “TEEN-AGE kicks” – incentivising sensible spending in retirement

  1. xyzzy says:

    No, no, no. Michael Johnson’s latest lunatic spin on his hobby-horse idea looks to me like an attempt to polish horse manure. Utter piffle.

    Like all promised FUTURE government incentives, it will be either massively diluted or entirely gone by the time those that were promised it get to the age when it should have become available. Tax relief NOW is required for anyone is to have faith in pensions. Without that, the only way to get folk saving for retirement is compulsion. This makes it look just like another tax (or more accurately, NI), which nobody will like. Reluctant pension savers neither save nor spend conscientiously.

  2. Gerry Flynn says:

    Xyzzy: Spot on could not have put it better myself, problem is that Johnson has the ear of Gideon and as a consequence it may be pushed through regardless of the massive opposition.

  3. henry tapper says:

    Nothing like a new tax idea to get the juices flowing! Personally I am all for it – and if we can’t trust a Government promise, whose promise can we trust?

    The problem with pensions is we’ve given up trusting and need AAA rated guarantees before we invest. That way is the road back to annuities- if you want that – and gold plated DB promises – be my guest – just make sure you’re picking up the bill.

    We cannot afford the bill for our current tax relief extravaganza, especially as most of the tax relief is directed at those with least need for it

  4. Gerry Flynn says:

    Henry-“trust a Government promise”, you are having a laugh, the vast majority of the british public would not trust the current or future Government not to renege on promises they make.

    So are you saying that someone that earns say £45k pa should not get tax relief at the higher rate on pension contributions as they are in least need of it?

  5. xyzzy says:

    Your use of “tax relief” is wrong. You should call it what it is, which is “tax deferral”.

    With that adjustment it is not a case of ‘affording’ anything; rather it is a case of delayed gratification. In other words, EXACTLY the thing that the government expects pension savers to do, yet is apparently no longer capable of doing itself.

    And as for trusting a government promise… as Gerry says, surely you’re just having a laugh here. We most definitely CANNOT trust a government promise, and should not even be asked to on something as fundamental as retirement saving.

    This entire area ought to be taken entirely out of politics and handed to a non-political and independent body. Politicians are unable to see beyond the next election. This entire misguided upheaval is driven purely by GO’s political ambitions. Politicians do not care what problems they leave their successors, they only care about looking good up to the end of their current term.

  6. Harry Lime says:

    Henry: “…and if we can’t trust a Government promise, whose promise can we trust?”

    Seriously? How about this gem from the 2008 pre-budget report?:

    “On the introduction of the simplified pension rules in April 2006, the Government set a lifetime allowance (LTA) to provide an overall cap on tax-relieved pension savings, set at an initial £1.5 million in 2006-07, rising to £1.8 million by 2010-11. In line with its core principles and to ensure fairness, affordability and sustainability of tax reliefs, the Government will maintain the LTA at £1.8 million for a further five years, up to and including 2015-16. This only affects the largest pension pots, those above £1.8 million over this period. The annual allowance will also be held constant at £255,000.”

    And yet, AA and LTA reductions in 2010, 2012, 2014, and yet more in 2016. Voters might have believed the government in 2008, but we would be stupid to believe it now.

    • Bob Champion says:

      I am not convinced that TEE works for two reasons.
      1. Without a government incentive (tax relief) how can government restrict how and when money invested can be used? Without restrictions how much will remain in the retirement pot when the individual ceases work. If there is to be a government incentive then we are back to EET (maybe different or a diluted version of what we have now) which gives the government then has right to put rules on how money invested may be used. If government place restrictions on EET regime what does that mean for the ISA market?
      2. Auto enrolment presents tax relief as a government contribution. If this is removed will we be throwing the baby (which appears successful in the large number of new savers it is attracting) out with the bath water? In my mind any changes need to build on this success and make savings more attractive not less.
      I need more information on how TEE will work in practice before it can win my vote.
      However to be balanced and open minded the argument that you cannot trust governments with regard to pension tax legislation is disingenuous and self defeating. Each time government has cut back on tax reliefs it has introduced protections for what has already been accrued in the system. Since 1970 I cannot recall when a change in pension tax regulation has removed tax privileges to savings that have already accrued. Unfortunately the result is that we now have a myriad of protections to cope with. Unfortunately with the government foregoing £50bn in income tax and national insurance each year this is the problem we need to face.
      We need to encourage people to save for their old age; scare stories do not help.
      The scare story on not trusting government which should work is the tinkering with the state pension. Its value in real terms, when you will receive it and reduction in spouse’s benefits are areas where expectations may not be met by the time it is received. If we want people to engage positively with making pension savings this is the point to make.
      The state pension is the largest amount of government expenditure, and with the ratio of workers to pensioners reducing it will constantly be under threat.

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