Me back in 2016 when phones still had wires.
In 2016 I started writing about transferring pensions to wealth management firms including old fashioned personal pensions but mainly self invested personal pensions.
There were some smart people arguing that taking a transfer value back then was good news personally (even if it meant the scheme was weakened), Here is what I wrote
I like the honesty of the FT’s Martin Woolfe, who claims he’d have to live to 100 or see the world economy collapse not to do better from a CETV,
“At current ultra-low interest rates, the transfer value of a defined benefit pension has become significantly overvalued. It seems sensible to take advantage of that fact. I have done so”
If you’re going to game, be honest about it! Which is more than can be said for this from a senior actuary (who should know better)
The FTSE 100 company executives “had been speaking to each other and were aware of the high transfer offers”, said Jon Hatchett, partner with Hymans Robertson. “These executives cashing in would have reduced the scheme deficit by millions.”
I am not an actuary but even I know that paying out transfer values which have become “significantly overvalued” is not reducing the scheme deficit, it is reducing the assets within the scheme to make future payments to others by an amount inflated by the freak-economics of Quantitative Easing.
In that year I had reached 55 and I started withdrawing my pension because I wanted to become independent of salary to say what I want and support pensions over wealth.
I am now happy to say that my pension , once it has passed to my partner/wife (as I expect it will) will come to an end. The money behind paying me a pension will pass to someone else and the Zurich pension scheme will continue paying pensions way after.
Now let’s think of what would be my situation if I’d taken the transfer. I would now breach the Inheritance Tax Limit and be faced with the prospect of paying myself an amount appropriate to my expectancy of living. I have said on this blog that I aspire to live to 93 but would I have the capacity to pay myself the right amount to ensure that if I died young, I didn’t leave a big tax bill to my family?
Up and down the country, and often abroad, people over 55 are starting to worry themselves to death over the cost of dying. If they had remained in a DB plan, that problem would not be a problem.
The sting in the tail for those with retirement wealth
Steve Webb and his chums at LCP have come up with some spectacular numbers showing what the IHT tax will do to people retiring with wealth rather pension from 2027. The FT (which is my kind of paper at present) picks up the research and talks to those people who in 2017 and 2018 they were explaining the advantages of taking transfers while discount rates were so low.
FT’s Merryn Somerset Webb stood in front of a group of us and told us that if she had a DB pension due her, she’d swap it for a pot of wealth. In that meeting Baroness Altman said the same thing. Two years later I wrote on the failure of regulators and trustees to protect the British Steel Pension Scheme from allowing pensions into DC pots, it is ironic to think of them worrying about wealth taxes, Caroline Rooke and the Government sponsored narrators of the mess never mentioned that.
In practice virtually no steelworkers will have an IHT bill but those who followed suit with bigger estates, the clients of wealth managers who had been in a DB plan, filled their boots in the years between 2016 and 2019 and even when the Government stopped contingent charging, transfers continued. One of the few good things of the LDI crisis was it made transfers unviable.
But for those who took a DB transfer and are now hearing about IHT from their adviser or in the press and social media, the transfer does not look quite the free lunch suggested by celebrity commentators.
If you aren’t an FT subscriber and if you have “wealth” in a retirement pot, then you should spend some of that wealth on an FT subscription. You will learn a lot about pensions and have less wealth to trouble the taxman with when you die.
You may wonder at how the taxman comes by such a windfall, it’s from taking up to 40% of your SIPP invested by you or your adviser rather than sat in a pension
As more of us die having taken our transfers between 2015 and 2020, the Treasury enjoys a bonanza. Steve Webb (not related to Somerset) has this to say in the FT
The bulk of the annuity involves those in the wealth industry explaining how their clients are being swindled out of later life prosperity, a thought wittily captured by the FT which suggests people spend the money in the pot
There may be a third option. Those who abandoned pensions may wish to return their money to pensions, that’s if we start seeing the emergence of standalone DB pensions into which single premiums can buy a lifetime pension for the wealthy and the income poor. Keep reading folks, the guy who was shouting about these issues in 2016 is still doing so nearly ten years later!
Pingback: Muppetry is on its way out, pensions are on their way back! | AgeWage: Making your money work as hard as you do
Before the election last year I seemed to recall that some pressure groups were encouraging Labour to commit to a wealth tax. It appears to me that the IHT proposals are a very effective wealth tax.
But like IHT more generally, IHT on your pension ‘pot’ is to a large extent voluntary, at least with a bit of forethought. It’s easily avoided by spending the money on a pension while you, or your dependent, are still alive. Buying an annuity is the labour-saving option.
I wonder if the main effect of the change will be to advance the tax take rather than to increase it. Instead of 40% IHT on remaining pension on death (plus income tax on the beneficiary if death is over age 75), people affected are already thinking of taking pension money now and passing it on to their children etc. immediately. Many of the people in this category will pay higher rate Income Tax at 40%.