How to eke out gains from your pension

I've been worrying about pensions again this week. A meeting with a group of pensioners on final-salary schemes made me realise (again) just how hard it is for modern private-sector workers even to dare to dream of the kinds of retirements that older people who found themselves in the right place at the right time are currently enjoying.

However much we save, we still buy ourselves no security the sum we might end up with to live on at the end of our working lives has nothing to do with our salaries and everything to do with market returns and annuity rates. And we can't control either of those things. So not only will we mostly end up with much lower incomes in the end than those who will still get final-salary pensions (these days mostly public-sector workers), but we'll get to feel insecure and worried about it for decades as well. It is all rather irritating.

Fortunately, Richard Evans, writing in The Daily Telegraph, has some thoughts on the ways in which private pension holders can have a go at levelling the playing field - by shifting money between spousal pension pots.

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A couple turn 55. The man has £500,000 in his pension pot. He withdraws his tax-free 25% £125,000. Then he enters drawdown with the rest. He takes out the maximum of £19,350 a year, pays the income tax due on it and then gives it to his wife. She puts it into her (new and empty) pension pot and claims back the basic rate of tax on it. They keep this up for 20 years (until they turn 75).

By then, assuming (optimistically, I suppose) that their funds have grown by 6% a year net every year, he will have £459,000 in his fund and she will have £729,000 of which she can now take 25%, or £182,250, tax-free.

The result is that instead of withdrawing only £125,000 tax-free from his pension, they have withdrawn £307,250. That's nice. But there are other benefits on top of this. The pension recycling equalises the original fund so that both parties can use their tax-free allowances in retirement (rather than just the husband's had he continued to hold all the pension assets).

It also provides a degree of insurance when it comes to death benefits. Once your pension is in drawdown (as the husband's is in this case), you pay 55% of the fund in tax on death. But if it is not in drawdown (as is the case with the wife's new pension) there is no tax to pay. Should both partners die (which would be unlucky after all this planning) their heirs would inherit more under this system than otherwise.

This is all a bit complicated. It also plays the system. We don't really approve of either of those things. But perhaps, when it comes to pensions, needs must?