George Osborne must really have it in for the annuity providers.
I mean, haven’t they suffered enough already? Since he did away with rules that required an annuity for pension savings, the life assurance sector has taken a real pasting.
At least the industry could cling to the hope that these brutal policies could still be sold to the odd sucker. After all, a known income for the rest of your life is a marketable proposition, and it may even win over those that don’t really appreciate the ludicrously lousy rates offered.
But news last week that Osborne is to remove the ‘death tax’ on pension policies has surely put the annuity on death row.
Until now, retirees knew that at the end of their lives, 55% of their pension pot would disappear into the treasury’s coffers. So, in many ways, it wasn’t such a disaster that the lucky annuity provider got the lot upon death.
However, now that a pension policy’s revenue streams can be left to beneficiaries (anyone, not just a family member) and taxed at the beneficiary’s marginal rate, who on earth is going to want an annuity where it goes to the provider instead?
I mean, who’s going to want an insurance policy that pays naff-all, which is then whipped away by the insurer upon death?
I’m with George Osborne on this one
To be honest, I’m absolutely astonished at Osborne’s continued largesse on private pensions.
I absolutely agree with him, but crikey – I wasn’t expecting any government rep to prioritise justice over an important and well-lobbied industry, let alone over the government’s own finances!
Today, I thought I’d remind you of the benefits of saving into a pension, because by now, they’re so vast.
Far too many people think pensions are so fiendishly complicated that they just don’t bother with them.
Well, if you know somebody thinking that way, I suggest you refer them to this article.
Everyone should be saving into a pension
1. When you make a contribution, you get your tax back at the marginal rate. What does that mean? Well, if you’re a higher rate taxpayer, you get the higher rate rebated back into your pension plan. And if, say, you’re a housewife and don’t pay income tax, the government will top up your contribution as if you had paid anyway (up to a certain limit).
Now that’s not bad, is it?
2. Long gone are the days of expensive and complicated tax planning. In today’s world of low-cost online investment supermarkets, you can create a private pension at minimal cost. You can use a self-invested personal pension (Sipp) to invest, just as you do with your regular broker.
3. All your earnings roll up tax-free.
4. When you come to retire (as early as 55), you can take a quarter of your fund absolutely tax-free. Okay, many people criticise pensions as merely tax deferment schemes. They tell you that you pay in the end, rather than at the beginning. But just think about the first quarter coming out tax-free.
Let’s say you put in £5,000 – and it ends up compounding over the years to £20,000. Well, on the day you retire, you can take out £5,000 (a quarter of £20,000) tax-free. That’s your whole contribution, dammit!
Everything else is rolling up free – who cares that you have to pay tax as it comes out?
5. As you draw down your savings, you pay tax at your marginal rate. Even if you were rebated as a higher rate taxpayer, when you draw down, your rate could be as low as zero (currently earnings under £10k) or up to 20%… or if you’re lucky enough to be in the higher bracket in retirement, then yes, you’ll pay the higher rate on your drawings.
6. You don’t pay National Insurance contributions on pension income. After all, we’re asked to believe the lie that NI is some sort of a savings plan to fund health care in later life. So it hardly makes sense to charge people for this fake insurance plan when they’re already retired.
7. Your beneficiaries now get to draw down your pension pot at their marginal rate of tax too. Your pension doesn’t die even if you do.
8. If you get your employer to make the contribution directly, then they don’t have to pay National Insurance. That’s now nearly 14% for most of us. So, if you’re working for a small company, then why not take a £5,000 pay-cut, and ask payroll to put it directly into your private pension?
Also, ask them to top up by the extra 14% they would have paid to the Exchequer. I’m not saying every employer will happily do this, but it’s got to be worth asking.
9. Following the changes announced last budget, you can now keep your money in your fund, or draw it down as you see fit.
It’s your money after all. Why not make the most of it?
This is all great news for the average punter
The tax advantages afforded to pensions are welcome, no doubt. But for the average punter, I would think the real benefit is simplicity.
That these things are now understandable. Together with the Retail Distribution Review (RDR) which has now made it difficult for financial advisers to make a living, it’s a brilliant step in the right direction. That direction being, let us all sort our own savings plans out, without the need for the constant drain that comes by way of the financial industry.
In fact, the deal is now so good that many fear a mass exodus out of defined benefit schemes, and into individual private schemes. That would certainly cause the government a considerable cash-flow problem!
It’s a fascinating topic area, and I’m sure you’ve got an opinion.
So let me know what you think. I’ll try to address any comments in future articles.