What's the "defining challenge of our time?" My guess is that not many readers are going to answer that question with "the profound political reform of UK pensions" that comes to fruition in early April.
But most readers aren't Martin Wheatley,the head of the Financial Conduct Authority (FCA). For him, all this pensions freedoms business is terrifying. Come April, he told the National Association of Pension Funds conference in Edinburgh this week, we enter "frankly uncharted territory".
Once everyone can take their pension money out as and when they like (subject to their marginal rate of income tax), there will be no way to prevent at least some of the over-55s from making bad decisions with their money.
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They will underestimate their longevity. They will overestimate their investment returns. They will be relentlessly overcharged by fund managers who are under much less pressure from personal schemes than from the old final salary schemes back when the costs of the pension affected the profits of the firm, everyone worked to keep costs low.
They will be sold (or mis-sold) complicated products that take no account of the fact that they are drawing down, not building up, wealth. They will go gambling at the Ritz, buy fast cars and splash cash on cruises.
They'll be targeted by criminals offering implausibly high returns in an age of historically low interest rates: fertile land in faraway countries; structured products; unmissable deals in the uranium market; and dodgy buy-to-let deals.
The new idea from the government this month to find a way to offer late-in-the-day pensions freedom to those who have already bought annuities by letting them sell those annuities on will just add fuel to the fraudster fires.
Almost no one really knows how to value an annuity. The skills needed take you "almost beyond astrophysics", one commentator said this week. So, it is almost impossible to think that very many annuity owners will end up with the right price for theirs. Those that don't, and end up dependent on the state in their very old age, will have a ready-made mis-selling case on their hands.
The FCA is keen to protect investors all through what they appear to be calling the "arc of adulthood". From your first contribution to your last breath, the FCA wants to be watching your back. All we can do, I'm afraid, is to wish itluck and remember to never respond to cold calls offering fabulous yields on incomprehensible investments.
The good news is that this won't necessarily all go one way. There are also going to be countless ways for sharp-witted pensioners to exploit the new system.
Changes to the tax treatment of pensions upon death mean that rich pensioners with large estates should stuff as much money into their pensions as they can, and run down Isas and other assets before they even think of dipping into them. They might even consider downsizing to do so.
Another possible strategy for upsetting the taxman is to think of ways to take your whole pension pot out in one go without paying UK income tax on it. Anything you withdraw from your pension pot in retirement is a mixture of your original earned income, tax rebates, dividend payments and capital gains.
But for tax purposes, it is nothing so complicated: HMRC treats all withdrawals as income to be taxed at your marginal income tax rate. If you try to withdraw too much at once, that marginal rate quickly becomes 45%.
So here's the question asked by a reader last week: if pension withdrawals are income, why shouldn't one withdraw some or even all of one's pension while resident somewhere where there is very low or even no tax on pension income?
I can't possibly condone such thoughts, but if you are the kind of person whose heart flutters at the idea of making off into the sunset with every penny of your tax efficient savings clutched to your chest, you might want to run the following past your financial adviser: ask him what he thinks about you buying a little flat in Portugal, and making yourself resident there for a year or two while you clean out your UK pension.
Portugal has a double taxation agreement with the UK; if resident in Portugal, you fall only under the Portuguese income tax regime. And it is running a scheme where foreign pensioners pay no tax on their pension income.
Your adviser might worry about you giving up the inheritability of a pension, given that those with UK domicile are still liable for UK inheritance tax (IHT), regardless of where they are resident for income tax purposes. Or he may find a horrible flaw in the idea. Either way, I'd be really interested to hear his answer.
While you wait for the feedback, be sure to contribute as much to your pension as you can while staying within the £1.25m lifetime allowance. There is no way the reliefs will survive in their current form, regardless of who wins the next election.
And you might also cast your eye over the kind of flat you would like in Portugal. After all, with sterling up 8% against the euro this year alone, £150,000 goes a very long way on the Algarve.
Be quick, though, because it won't last: cheap currencies will encourage other buyers, quantitative easing (QE) will push up all asset prices in Europe, and of course, the pound's strength might prove short-lived Capital Economics notes that "the cost of insuring against a fall in the pound against the dollar around the time of the election has risen sharply", and warns that foreigners' appetite for gilts has waned.
If you are going to buy, now is probably as good a time as any. It might save you a great deal in tax. If not, you'll at least have a bolt hole for later in the year should you become as nervous about UK politics as the markets are.
This article was first published in the Financial Times.
