Don’t spend your pension last

Don’t spend your pension first

Spend your pension.

I like Moira O’Neil, she speaks to her readership. FT readers have pensions and most are wealthy. Many have advisers who are having to rethink their wisdom on “spending pensions last”

Many advisers are busy working out how best to switch their clients’ pensions back to their original intended use — providing retirement income. This might involve reconsidering taking drawdown or annuities earlier than originally planned.

This of course is to do with tax and more particularly death or inheritance taxes. It is a behavioural phenomenon that people are prepared to organise their later life affairs around inheritance tax while all they need to do is pay a relatively small monthly premium to a life insurance company for a whole of life plan that guarantees a certain sum whenever you die.

People see that premium as a tax (I know I do) and would rather set aside the pension pot.

Spending the pension pot has become a taboo, almost an admission of guilt for many people. Exchanging an inheritable pot for a non-inheritable first or second death annuity is almost a betrayal to many people of my age.  I know, I speak with them.

The tax policy the Chancellor would love to fail

Some advisers are claiming that pensions have been turned upside down and yet the extra tax receipts from demanding IHT on unspent pots is tiny

By bringing pensions into the loop, the government estimates that an extra 1.5 per cent of total UK deaths will become liable to pay IHT. That’s 10,500 out of around 213,000 estates with inheritable pension wealth in 2027 to 2028.

Further to this, 38,500 estates will pay an average £34,000 in additional IHT because pension assets are included in the value of the estate.

These numbers are tiny. By comparison with the impact of the NI hike, they hardly touch the sides and the impact could be next to nothing if people change their behaviour. As O’Neill and Billy point out

But these are the revenues that HMRC says could be raised based on current financial planning behaviour. And those 49,000 estates have several tools at hand to reduce down the IHT bill. William Burrows at financial adviser Eadon & Co says:

“It should be perfectly possible for people in their 60s and 70s to rethink their pension strategies.”

Herein the point. The tax receipts (VAT + ) and the boost to the economy of recycling pension money back into the real economy is the real fiscal win for the Chancellor.

By shifting people’s perception of a pension that needs to be spent over the lifetime , the Chancellor creates a new normal that can also impact the social evil of double dipping. Double dipping is the practice of spending the pot early in the expectation of getting extra benefit later from the welfare system, The State needs to normalise the spending of pension savings on pensions for double-dippers too. John Stuart Mill is brought to mind again

Government wants to stop some people spending their pension first and some spending their pension last. They want to normalise pension saving and they know how to do thiis.

The auto-enrolment nudge was not just towards contributions. Over 90% of invested money into workplace pensions is normalised into default funds that do little harm and (usually) a lot of good. We have made saving into cash or into structured notes abnormal and we have created a nation of savers into funds which avoid damaging conservatism or reckless speculation,

The auto-enrolment nudge can also normalise spending and here the budget has given matters a boost. It remains to be seen whether the annuity will make a comeback (I think and hope it will), it remains to be seen whether we can use the method of the scheme pension, (as we are pioneering with Pension SuperHaven) , but I think we are returning to a period where the normal thing for people to do when they reach retirement is to “get a pension”.

Getting a pension

It is odd when we think of how much time is spent on saving for a pension, that so little time is spent on the decision to “get” one. If you ask most people how to “get” a pension, they will look blankly at you, pensions are things that happen to you.

The State Pension happens to you, you are required to tell Government into what account you want your state pension paid but that’s about it, You can opt out of getting it when it comes due for you but few defer. You can choose to boost it if you haven’t got a full entitlement and you can get “extra” by successfully applying for pension credit but for most people, the State Pension just happened.

This also used to be the case for company pensions. Sadly hundreds of thousands of people chose to leave a pension scheme that got them a pension on a certain day and exchanged it for a pot they could spend as they like. Many considered that was a pot they could spend last and may now be considering returning to the original deal. Many are saying they were betrayed but who by? Ultimately they took the decision.

The days of “getting a pension” will return, I expect most DC schemes to become money purchase schemes again, with savers spending their pots on annuities and pensions.

 

and that is why I promote the fun that pensions bring through the Pension PlayPen and the security that pensions bring through AgeWage.