A long time ago Jeremy Clarkson had a TV show alongside his 53 cars and a death wish. And in one episode he discussed pensions.
Watch the video below for proof, and note that Clarkson’s pension plan involves:
- Spending 10% more than you earn
- Eating and smoking enough to die before you’re old
- Blowing anything left over on an E-Type Jag!
It’s pretty funny stuff, but obviously Clarkson was speaking as a bigshot media personality who now earns well over £1 million a year. (Not to mention someone who probably will die of one of those things!)
He’s also right to note the stupid limitations and restrictions on pensions.
Most of these are still in place today, and they are why I use (and mainly write about) ISAs instead of pensions.
I thought the other guy did quite well, considering. He’s called Steve Bee and he’s still flying the flag for pensions on Twitter.
According to his Jargon Free Pensions website, Steve Bee is:
The former Head of Pensions at Prudential and pension strategist at Royal London. A multi award winning blogger and commentator on pensions, is the only person ever to have submitted evidence to a Commons Select Committee in cartoon-strip format.
Steve’s website is stuffed with cartoons, too. It also has pictures of Mr Bee looking a lot older than in the video above – living proof that time catches up with us!
Clarkson’s TV chat show was aired sometime in the late 1990s. He would only have been in his late-30s back then, but he looks like a case study for the anti-pension strategy he espouses.
Yet he’s is still going strong – and he actually appears less like he’s at death’s door now than in the video.
According to Clarkson’s website he was born in 1960. At 50 this year, it looks like Clarkson’s going to make it to a bus pass (and a fat pension) after all.
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The one thing that often gets missed with a pension is “tax relief”.
Effectively you get a 25% uplift – with 20% tax relief – on your contributions without any investment risk.
Example: for a basic rate tax payer pay in £80 (net) + £20 (tax relief) = £100. For higher rate tax payers a further 20% (£20) can be reclaimed through their tax return = £120 or if you want to look at it another way the effective cost for the pension contribution is £60 to invest £100.
Many employers will match contributions up to certain limits e.g. you put in 6% and they put in 6%. The actual net cost to the employee in this case 4.8% (you get 1.2% in tax relief i.e. 20%) of salary to receive a total contribution of 12% of salary – not bad at all!
This does give a pension contribution a considerable boost over an ISA contribution – where money is invested net of tax.
Also, for pensions it’s possible to invest directly in things like commercial property (assuming you’ve got the funds to do this) and also AIM listed stocks for those sophisticated enough.
The tax treatment once inside the wrapper is basically the same. It’s on the way out where it gets restrictive for a pension although for most people they can get a 25% tax free cash lump sum.
For higher rate tax payers pensions are difficult to ignore, personally, you’d be mad to miss out on the tax relief available.
The main concern is a change to pension laws that could end up restricting access. Not too long ago the “Tax Free Cash” element was newly referred to as “Pension Commencement Lump Sum”. Some commentators felt that this was a prelude to altering the tax treatment of the lump sum.
Pension contracts are a lot better these days in terms of cost. SIPPs have come down in cost and there are some excellent products out there now.
Steve Bee is a “doyen” of the pensions industry.
@T Jones
Actually calculations show that for basic rate taxpayers and the self-employed (with no employer contributions), an ISA should be much better than a personal pension over the long term, with the added bonus that you have access to all your capital all the time, rather than being forced to transfer 75% into a poorly paying annuity at the end, which is then taxable.
For higher rate taxpayers pension tax relief probably gives enough of a boost to win over, but SIPP charges are still too high given that the provider does virtually nothing. It only becomes reasonable when you have a decent five figure sum or more to invest (which of course higher rate payers may well have).
Best advice for many would be to use your ISA allowance first, then consider pension planning with whatever is left over.
Thanks very much @Thomas and @Faustus for your thoughts, which are in danger of taking the wind out of my sails for the post I’ve promised a different Monevator reader on ISAs versus pensions! I hope to have that up on Monday, so please do check back to continue the discussion.
Faustus
You aren’t forced down the annuity route at retirement anymore as you can drawdown your pension – known as unsecured pension – then at age 75 you can choose between an annuity or alternatively secured pension (ASP), although the tax on ASP is horrendous and wouldn’t suit most people.
Annuity rates depend on things like age, gender and even state of health and your postcode. They are also affected by gilt prices and the performance of other types of fixed interest investments as this is how annuities are funded by product providers. You can get an enhanced or impaired life annuity depending on your state of health which is likley to be higher than ordinary rates. You can also obtain guarantees for up to 10 years. The fact that someone will give you an income for as long as you live can offer peace of mind. You can even add a spouse’s benefit although, this does tend to cost more.
According to the Annuity Tables:
A male age 65 with £50,000 pension fund, single life, level annuity with a 5 year guarantee would generate £3,372 per annum from Canada Life (6.744% gross yield, after 20% tax a yield of 5.4%).
At age 70, for the same annuity the gross yield is 7.742%, net 6.2%, again with Canada Life.
Source: http://tim.burrowscummins.co.uk/ratetables/atables.aspx
You can put up to 100% of salary into a pension capped at £255,000 (gross) and receive tax relief. ISAs are more limited and have, up until recently, had relatively low allowances.
Pensions can also be used for salary sacrifice and save on NI contributions.
If you need access to your money before age 55 then pensions won’t be good option. I believe in the USA, in certain circumstances, you can get at your pension early. This would be a useful addition to pension policy in the UK.
http://www.moneymarketing.co.uk/channels/corporate-adviser/early-access-to-pension-scheme-cash-could-increase-saving-by-a-third/177386.article
@Thomas – Surely most 65-year-olds will need an inflation-protected option, given life expectancy is well over 20 years if you make it to 65? That reduces the starting yield down to a far less attractive 4.14% from Canada Life. Personally, I’d rather take my chances with blue chip dividends if I could afford to, unless I was loaded enough to ignore inflation proofing and could reinvest early surplus income instead.
That said, I do think turning some significant portion (say 25-50%) of one’s retirement pot into an annuity is probably prudent to reduce both market and legislative risk.
Agree with your comments on early withdrawal. Also agree (again, ahead of my post!) that if you’re in a job with significant employer support for your pension (matching contributions, say) then pensions are pretty close to a no-brainer, but you still want to strive for maximum control to stop your money being spent on advisers and pension fund managers rather than your old age.
It can take 17-20 years for a pension annuity with escalation (inflation protection) to match the return from a level annuity. It’s a difficult decision to make, but for most people the go for a level annuity.
I suppose it’s a balance of considering if someone may live longer or die sooner than expected and how likely is inflation to take off in the future. Given the time-scale involved, it’s a tall order.
@Thomas – Good points. I guess for me (I’m still a few decades away from deciding, and the rules will have changed by then anyway) if I was going to go 100% annuity I’d take RPI-linked escalation as a defense against an inflation scare. I presume your 17-20 year figure is based around 3%. I think I’d be prepared to take a slight hit early on if I was going all-annuity to be covered if inflation spiked upwards.
If I was doing the 25% to 50% annuity approach I suggest, perhaps I’d go for the level annuity and have the equities as my inflation hedge.
According to the FT, higher rate pension relief is for the chop from all the major parties, incidentally, although only the Liberals have it in their manifesto.