calling all late 40s+ wannabe early retirees – your ship’s come in…

Martin Lewis, he of moneysavingexpert fame, considered the pension changes “both wonderful and horrid“.  Wonderful, because you now can take it all in one go subject to normal income tax rules, without all sorts of restrictions that mean you have to drip out the money over 20 years or so. And horrid – because you now can take it all in one go, so people may blow it all on this sort of thing

That'll be a nice Lamborghini, and to hell with the money
That’ll be a nice Lamborghini, and to hell with the money

as the pensions minister quipped.

Extreme wealth warning – everything to do with pensions is hard, counterintuitive and needs careful consideration

You’re on here because you have an interest in personal finance, right? Most people consider it dull as ditchwater – indeed I only sharpened up my act when I realised that getting my skull round this would enable me to quit an increasingly toxic workplace. Before then I was happy to rock up and work, do a reasonably interesting stuff  in return for beer and toy tokens. The Grauniad delivered this quite astonishing piece by Joanna Moorhead saying

When it comes to pensions, choice is not necessarily desirable – especially for those of us burnt by endowment mortgages

WTF? It is precisely because I was burnt by endowment mortgages (though reinstated) that I don’t trust insurance and life companies and was grateful that in pension provision I never had to think about them. If I had to manage a DC pot I would now be deeply grateful to Osborne for letting me escape the clutches of this dodgy bunch of charlatans.

Of course, there are people who enjoy the personal finance sections of newspapers, and who love nothing more than poring over the small print of different finance options on offer, but I’m not one of them. I’m the woman looking for the switch for “financial autopilot”, and right now, with the changes to annuities, that looks suspiciously as though it might have disappeared from my dashboard.

Money is crystallised power, a claim over human work. All power stores are dangerous if you don’t think about them. It’s why people don’t carry petrol around in open buckets and you learn something unique and instructive if you drop a spanner across a car battery. Endowments were the autopilot choice for a young ermine and it appears a young Joanna. The older ermine learned from that when his career flicked out of autopilot, and so should you, Ms Moorhead. ‘Cos the ground is never far away, and it has an unhealthy attraction for things above it.If you fail to plan, you plan to fail.

Thinking is about ten times as hard with pensions than ISAs because of the decades it takes to get into them, and the hopefully over decades they will serve you. The Grauniad seems to be in jealousy mode all round at the moment, as they are bitching that you need a salary of £125,000 to make any use of the the New ISAs. FFS people – I have never, ever, earned anywhere near that much and I have zero income at the moment but I am damn well planning on using my full NISA allowance over the next few years. Dear Guardian, have you ever heard of that antiquated notion, spending less than you earn and saving money? You guys should try it sometime, instead of sipping your cappucinos and griping. No, if you spend your nice Guardian salary on consumer shit then a NISA is no use to you, but you get lots of lovely toys. Each to their own.

small changes make big differences

You don’t see an awful lot about pensions on PF sites because they’re hard, they are built up over secular[ref]in finance secular means over periods longer than the typical boom/bust business cycle of about five to ten years[/ref] timescales in general and small changes can make mahoosive differences. Let me illustrate this with an example. In 1988 I joined The Firm’s final salary pension scheme. It had a simple proposition – every year you accumulated entitlement to 1/60th of final salary, with a normal retirement age of 60. In practice than meant if you worked for The Firm for 30 years you would get half your final salary as a pension. The Firm expected pensioners to die at 80 on average, thus paying out for 20 years. You could retire at 50, in which case they would pay out over 30 years, 10 years longer than planned so they would actuarially reduce your pension by 50% – you lose roughly 5% for every year drawn before normal retirement age (NRA) of 60.

The Firm decided it wanted to reduce costs, so it closed this scheme to new entrants in 2001. In 2009 it decided it wanted to save even more money.  It appears UK law doesn’t permit firms to claw back pension entitlements already earned because they are part of your pay so they have to contractually honour previous years agreements. But they can change things going forward. So The Firm changed three things, and very few people spotted how much damage was done to their pensions. The Firm

  • changed the NRA from 60 to 65
  • changed the accrual from 1/60th to 1/80th
  • changed the accrual from final salary to career average (each year’s entitlement is based on the inflation adjusted salary for that year)

Three small changes – HR obviously wept the usual crocodile tears and said it won’t make much difference for people retiring soon, and allowed people leaving up to three years from 2009 (just excluding an ermine – I was six months out of the grandfathered rights date 😦 ) to leave under the original terms. Now who is most interested in pensions? Old gits, who are about to leave. So HR shut them up by grandfathering them.

Let’s take a look at what that did to me

how the the changes affected my pension
how the the changes affected my pension (rebased to 60 and a nominal 10k final salary)

Now I obviously surrendered some pension accrual leaving 8 years early, but the changes made that easier to do – I was giving up less. It’s also relatively simple to see that the total change is about 25%, which coincidentally happens to be the amount I was able to save in AVCs and will take tax-free as a pension commencement lump sum and invest myself in my ISA, effectively creating a tax-free DC pension to compensate for the loss due to retiring early. I will still have less because I will draw the pension a little early, though part of the reason for writing this is that has changed with Osborne’s changes. I may defer it for another year or so and use a personal pension, because as a non-taxpayer I can get a free 20% bump up on £2880 or ~£5700 and getting a 10-20% ROI on cash is difficult to ignore in a ZIRP environment 🙂 It isn’t a lot of money, but it’s worth thinking about.

Now imagine a 10 year younger ermine, entering The Firm just before the portcullis closes on the final salary scheme.

The younger ermine eats a much greater hit
The younger ermine eats a much greater hit

The poor bastard takes the same hit as the old Ermine, but he has to suck it up to 60 to get the same amount as the old Ermine who pulled the big red ejector handle it in his early fifties! Now the younger ermine probably takes an even greater hit because of the career average change, which reduces the base salary on which the pension is calculated. And The Firm was craftily shifting more and more pay from consolidated rises to bigger bonuses, and bonuses weren’t pensionable.

Now the proposition of a final salary pension scheme is simple, so if small changes can make that sort of effect, the sort of thing the Chancellor has done can make even more effect on a DC pension. Let’s take a look.

Osborne’s Budget changes

To a first approximation, he’s lifted the restrictions on what you do with the money once you reach 55. The Government’s own summary is pretty good. People younger than  42 should beware that this age will be dragged up

this consultation also includes a proposal to raise the age at which an individual can take their private pension savings under the tax rules from 55 to 57 in 2028, at the point that the State Pension age increases to 67.

so if you are younger than 42 be careful. If you are much younger then expect this to be drifted up to 60. That is the evil heart of pensions – governments can change the rules after you have locked the cash away. If I personally were younger than 42 than from a purely financial POV I wouldn’t touch pensions with a bargepole, except enough to get any employer match, and perhaps to lose any 40% tax. But that’s me – YMMV. That’s not saying I wouldn’t save for retirement, but I’d use ISAs for that. However –

There are some things only pensions can do

1403_avoverThis judgement isn’t as simple as it seems, however, because one of the advantages of a pension is that it can’t be seized by most creditors or held against you for many benefit claims. You may be doing fine and swimmingly at the moment, but globalization and technology are shifting the balance towards capital and away from labour. Pensions help you build capital safe from the backdraft of this. If I were a younger Ermine in my 20s but with the older head of now, from what I have seen I would not expect even a good job to last for 30 never mind 40 years. The power is shifting away from workers, the pace of change is too high and increasing, and the winner-takes-all effect is too high. Tyler Cowen’s Average is Over shows the way – reveiwed in The Economist. I would place greater effort on escaping the rat-race earlier and owning capital rather than relying on my rapidly depreciating labour. The time for consumer frippery and shitloads of debt is over. I have no desire to live like a Transnational – I am not ambitious enough and probably not bright enough.

Many people my age have been caught on the hop by this – the increasing routine and rottenness of my job, and the micromanaged incentives are the first reaches of this shift of labour to capital. When I see a business card that says ‘Consultant’ and I see grey flecks in the hair of the holder I mentally translate into ‘Unemployed’ – because so often it’s true 😉 It heartens me to see that in the UK PF community there are more and more people who are looking for financial independence at much younger ages than I am. I think these are cleverer people than I was, who are picking up the straws in the wind of the incoming shitstorm for jobs. Get on the side of Capital, because Labour is losing the fight, unless you can get on the side of the 1%, and let’s face it, the odds aren’t great 😉

Society will eventually have to shift. Look at some of the changes coming – the increase in the personal allowances, meaning an increasing number of voters will not be taxpayers. They will, of course, vote for jam today and for somebody else to pay. Look at the stats on tax income – over two thirds of the income tax take comes from people earning 32,000 and above. These are people who individually earn more than the median net household income for families with dependent children[ref]ONS Statistics on the average family income, UK [/ref] in the UK

Pensions can help you with this, basically by locking up money against the incoming shitstorm and throwing the key out to your future self many years in the future. You can hitch a ride for your future self  on the side of Capital (if you use equities rather than cash) that, in current legislation, can’t be taken away from you[ref]Divorce is one exception to this[/ref] and it doesn’t impair your ability to claim benefits[ref]I believe this was not necessarily the case for Universal Credit. However, it looks like Hell will freeze over and the devil will learn to dance before Universal Credit is launched, so I’d lump that in with the general uncharaterised risk of Government Fiddling[/ref]. Whether that is attractive to you depends on your view of the world and where it’s going, and to some extent your rate of discount of jam tomorrow compared to jam today.

So what did Osborne change?

There’s a common belief that you had to purchase an annuity with a define contribution pension but that was never true until you reached 75. Those with £20,000 of guaranteed pension income could take any amount of their money subject to tax and those with less than that amount of guaranteed income could draw down their money at a rate determined by annuity rates in capped drawdown. What he’s essentially changed is that anyone over 55 can take as much of their pension capital as cash, subject to normal income tax as opposed to the punitive 55% rate it used to be. But if you are taking £150,000 from your pension for that Lamborghini then you’re paying 45% tax on all of it, bud, so you better strike a deal for no more than £82,500. Previously it would have been 55% taxed, so you’ve have got 67,500. Put that way it isn’t such a stupendous change for high-rollers, though £15k probably gets you the walnut trim or the gold-plated gearshift knob.

The rate you get for an annuity rises as you get older – annuity rates for people at 75 are much better than for those at 60 or 65 because they’ll be paid for less time. There is much to be said for starting off in drawdown and switching to an annuity later on. Most people haven’t saved enough into a DC pension, and this gives you a better chance of a decent lifestyle even now – the annuity is not dead at all. Once the annuity return beats out the return you get on equity investment it makes sense to switch[ref]as is usual with pensions there is a whole shedload of issues that complicate this in favour of annuitising earlier, in particular your attitude to risk and your health[/ref].

People hate annuities because they can’t leave them to their kids among other reasons…

But you don’t get to leave it to your kids. What seems to be behind a lot of the rumbling about annuities is that they die with you (they can look after a partner at some cost but that’s it). So the children get n’owt. Now the whole issue of capital and inheritance needs sorting out by some future British government, and it won’t be pretty. I’m personally of the opinion that inheritance is an abomination in a notionally democratic and meritocratic society. It harks back to older societies where capital accumulated very slowly so it was the only way to build a business – over generations, and it all smacks of the privilege of kings and nobles. There were no startups before fossil fuels. It may be the most natural thing in the world for parents to want to favour their children, but IMO a 100% inheritance tax where the entire estate escheats would be an incentive for those parents to sort their shit out while they are alive, and it would go some way to not embedding privilege. But I can say that because I am child-free, if that weren’t the case I would probably line up right behind the old buffers of the Torygraph who think that inheritance tax is a terrible thing, because having children does that to you 😉 Somehow society needs to sort this out in a world where it is increasingly difficult to make your fortune in a working life, because increasing inequality lets the 1% bid up the price of essentials like housing. God knows what the right answer to that looks like, but it doesn’t seem to me to be the direction we are going. History shows that aristocracy does work, but needs a lot of serfs…

It’s important to note that one of the reasons annuities looked such horrible value in the last five years is that the Government’s policy of printing money and keeping low interest rates meant annuity providers couldn’t offer decent rates – the underlying gilts just didn’t give people the returns they wanted at 55 or 60. Osborne’s been a good guy in not forcing you to take an annuity, though remember you didn’t have to do that anyway. But he hasn’t improved your ability to get a low-risk income at a price you want to pay. You can stay in equities, as you always could with drawdown. But you are still SOL if you want to avoid the volatility of equities. You are going to run out of money if you didn’t like the annuity rates on offer when you retired and you can’t stomach the rollercoaster of the stock market. There ain’t anything better on offer at the moment[ref]You need to learn or take advice about getting the mix of asset classes right because the volatility of a 100% equity allocation is probably bad for the old ticker of a retiree 🙂 Although mathematically it gives you the best chance giving some of that up with a stocks:bond mix for a smoother ride is probably called for.[/ref] – as a cautious saver you have to do Your Bit to pay off the National Debt.

NASA tells us we are doomed

There’s a NASA report that paints a bigger picture, basically they are of the view we are Doomed

…. appears to be on a sustainable path for quite a long time, but even using an optimal depletion rate and starting with a very small number of Elites, the Elites eventually consume too much, resulting in a famine among Commoners that eventually causes the collapse of society. It is important to note that this Type-L collapse is due to an inequality-induced famine that causes a loss of workers, rather than a collapse of Nature

The bit they seem to be missing is that the Elites are busy eliminating the need for a lot of the workers… The Ermine is not an optimist by nature, but I have learned that the bear case always sounds smarter. This is because things go titsup in a big way, and they can be imagined – at the moment it’s robots and globalisation stealing out jobs, climate change, it’s easy to picture them. What is harder to see is that people chisel away continually at improving the upside. 99% of them fail, but the incremental up-shifts add up, but they fly below the radar because they individually don’t look that much. Who would have guessed that improved computer networking would spawn whole new industries like web designers and security experts and MOOCs and improved living standards for what we used to call the third world by letting them work for us[ref]that’s hellaciously First-World centric, and it’s transiting to we will all work for our Transnational Corporate Overlords, since the erstwhile Third World is busy taking the fruits of their labour and turning into Big Capital. The First World’s first-out-the-gate advantage is being competitively thinned out.[/ref], and high-frequency trading etc? After all, we had networking before – I recall Novell Netware, where the piss-taking bastards at Novell would charge you a licence per connection[ref]or you could be fleeced per server. Either way they had you by the short and curlies and needed to be destroyed by the Invisible Hand[/ref], and added a piece of code to explicitly kick people off if more people connected to a server. Then TCP-IP came along, eliminated such monopolistic gouging and ate their lunch. Then in ’94 Berners-Lee developed the WWW and here we all are. None of those developments looked earth-shattering at the time.

At the moment the Chinese are working on thorium nuclear reactors that address many of the the hazards associated with nuclear power, though they will no doubt have problems of their own.It may or may not go somewhere, but if it does, then it will be a win for energy and for knocking back global warming, simply by taking out a lot of China’s coal-fired power generation. In general, positive change comes in small chunks that steadily mesh together and add up, whereas things that go wrong come in great big unexpected lumps that generally give us the feeling of OMG we’re all going to DIE. And the atavistic caveman in us looks at the great big shadows of our fears cast against the wall and it makes better copy. Bad news sells, and nobody’s managed to ever sell a good-newspaper yet.

Pensions get a lot more interesting when you get past 45

One of the primary risks younger people face in using pensions is that they’re saving a lot of wealth is a locked-up place that Governments can easily target, since Government sets the rules. A future Labour government could go back to annuities – I’m not saying they have thought of it, but them might. There is a general downdrift of the amount you can contribute to a pension (£40k if you earn more than that) and there is also a general downdrift of the total amount you can save in a pension and get tax relief, the Lifetime Amount which is currently £1.25 million. That sounds a lot, and I, for instance have nowhere near that much but for someone in their 30s now it’s not unreasonable to aim for, because the value of money roughly halves every 15 years. In thirty years’ time that would be worth about £312500, at a 5% withdrawal rate that would be a pension of £15625 p.a.

You can see the direction of travel of pension allowances at HMRC, and it’s not positive. A whole lot of these problems go away as you get closer to drawing the pension, because, recognising that people can’t take money out of a pension to conform to changing legislation, they often let you protect your savings against changes. The quid pro quo for that is that you stop saving into a pension. Totally and for the rest of your life. That’s not so bad if you are in your late 40s or fifties and drawing at 55, after all HMRC indicate you are limited to a pension of about 56k at 65 so you are hardly on the breadline, you just have to stop paying into your pension for a few years, pay a bit more tax and use ISAs but if you are a young buck at the top of some financial institution, Doing God’s work, say, then your dreams of retiring to round the world yachting and golfing will need you to find some other way of saving for retirement. If you are that rich you’re not reading this, and anyway, you can afford to pay for the relevant financial advice on what to do.

taxpaying wannabe early retiree old gits, your boat’s come in

If you are a taxpaying old git, however, you are all of a sudden much better off, particularly if you have savings or are prepared to borrow money. Drive your salary down to the personal allowance by putting everything above that into a personal pension. Do that for a couple of years, and then when you stop work extract this money but leave your main pension deferred (ie still in accumulate mode) – the first £13k a year is tax-free[ref]That’s £10,000 personal allowance plus ~£3k tax-free PCLS[/ref]. Obviously you need a big spreadsheet and do a lot of what-iffery to play off any loan/mortgage not paid off against the tax bung, and it only works if you can slow your rate of withdrawal to less than the personal allowance. There’s no point in saving 20% tax to pay it again later.

ageing 40% taxpayers and child benefistas – this one’s for you

However, if you are a 40 or 45% taxpayer than you can make out like bandits  – squeeze yourself down to the 40% tax threshold and accept you pay 20% tax on the way out. It’s free money 🙂 Well, it isn’t, it’s a way to stop the Government stealing your money, and I wish I’d had this available to me. Fill your boots, and if you are a child benefista than you can go get that too. It’s welfare for the better off…

one of the obvious things for a non-taxpaying old git to do

Is save £2880 into a personal pension, saved as cash. In a curious fit of minor generosity, HMRC then up this to £3600. In my book that’s a profit of 25%. Do a couple or three of years of that and you end up with a profit of about 10%, because inflation will knock off about 5% of the return. And my DB pension gets 5% bigger because I draw it less early. I initially started looking at this to see if I should do some of that this tax year, but there isn’t enough time to see what exit charges are like – all the pension providers’ websites seem to be based on annuities and the like. So I will forego my free bung of £720 for this year from HMRC because a few days isn’t long enough to get this right.

I researched pension costs at Cavendish Online which seemed to be an often suggested good value broker on MSE. For a simple and quick in-out you will probably favour a stakeholder rather than a personal pension, because costs appear to be lower, and non-taxpayers are going to be playing with £3600 a year at most. A personal pension gives you some more flexibility of investment choices, and a SIPP is the most flexible. You pay more charges are you go up the hierarchy. What I couldn’t determine was the exit charges.

There is still a while till I get to 55. After than an immediately vesting pension plan (IVPP) seems explicitly designed for non-taxpayers, and hopefully by then these will return 75% of the capital as cash, rather than as an annuity. To be honest I would expect some future Chancellor to block that particular loophole. Unless they take pity on all us impoverished non-earners on the assumption that we are all poor, rather than enterprising – once I discovered how much income was taxed turning it into wealth before it got stolen became a priority.

I don’t have enough expertise to know much about the issues for younger folk – the big risks of Government fiddling are high, but on the other hand the protection from creditors is a great plus point. Shit happens in a working life – the big ones of Redundancy, Divorce, Disease are always with us. Death hopefully less so – one of the reasons the retirement age is drifting up is because you young’uns will live 10 years longer than me, and probably in better health.

These pension changes are particularly transformational to wannabe early retirees – ie those who want to retire in their mid-fifties rather than at 60 or 65, and particularly those who are paying 40% tax. If this includes you, you would do well to try and look at these changes from every angle to see how they could help you reduce your tax bill or delay the point at which you take you main DC pension. I haven’t had time to give this enough thought. Unlike Joanna Moorhead, I’m prepared to put some thought into how to make this work for me.

What about those Lamborghinis and BTL sky-rocketing house prices then?

There are two dark fears raised. One is that people will blow their money on frippery, and the other is that people will charge into BTL and jack up the price of houses again.

Lamborghinis, cruises, consumerism gone wild

Guess it’ll help the economy in the short-term ;). I’ve always been puzzled by how people go mad when they retire normally (60/65) and spend on a big blowout holiday. Your capital is at its highest potential at the point of retirement, a lot is going to change and you don’t know how it will feel to live off capital. That 25% PCLS is part of your overall wealth – it isn’t ringfenced for stupid spending. It’s a very, very different feeling to living off income. Blowing a lot of it at that point always struck me as a really strange thing to do – if you wait a year then you will have chilled, plus you’ll actually know whether you really want to spend a lot of money on the extravagant dreams of a cubicle slave thinking ‘Anything but this’. Booking the cruise while you’re still working seems odd. But I am different from other people. According to the BBC it appears not to be too bad a problem in Australia where they have this sort of thing already

Hordes of greying BTL investors jacking up house prices.

The average DC pension amount at the moment is £17,700 and about 320,000 people a year currently start drawing DC pensions. It’s probably not enough to seriously shift the needle on the dial, compared to daftness like Help To Buy

Final wealth warning

I’m not a pensions expert, and indeed had to research all this about DC pensions since the Budget because there seemed to be an opportunity. I can afford to screw up there, because this is only a small piece of my retirement planning to try and bag some free money. This post is tossing out some ides. Some may turn out to be hogwash. For God’s sake take advice if changing anything about pensions, or very, very seriously DYOR. After all, I bottled on £500 of potentially free money because I came to the conclusion I don’t understand the opportunities yet. That’s okay. It’s hardly a life-changing sum and it’s better to get it right that save £500 and pay £600 in charges! Be careful out there.  I am sure that somewhere in this septic isle there is a bunch of ne’erdowells crafting a website with a dodgy proposition to separate these newly freed pension amounts from their rightful owners…

32 thoughts on “calling all late 40s+ wannabe early retirees – your ship’s come in…”

  1. A really excellent piece and echoing most of my thoughts following the budget.

    I welcomed the news wholeheartedly, however the constantly drifting age limits worry me. I’ve no intention of waiting until 60 to retire, however the employer contribution and tax relief is too good to pass up.

    I guess with most things the trick is to spread the risk. I put 15% into my pension (A relatively low figure for early retire, but I am relatively young still!) and intend on massively over-paying the mortgage with most of the remainder. IIRC its pension and primary residence that dont count towards wealth calculations so a good place to store it in my opinion. The ISAs can wait until afterwards.


  2. Glad to see the BTL fears appear overblown.

    As the sky economics guy says ( ), the OBR’s report appears a gold mine of information. (Though of course it suffers from confidently making predictions which will be totally wrong – e.g. on their chart 3.13 they show their December house price inflation prediction was out by 3% within a couple of months, but happily extend their line out to 2019!)

    Click to access 37839-OBR-Cm-8820-accessible-web-v2.pdf

    Stats is another area we as a country excel at. Shame politicians can’t understand them…


  3. As a sub 30 year old I can only look forward to misery.

    I’m sure as soon as all the NISA’s are filled a few years down the road – there will suddenly be a notional 10% levy on withdrawals / capital gains – (see dividend taxation outside of an ISA), this will then be gently pushed up to 20%+ “with inflation”.

    So I can look forward to trying to squirrel away now – for little advantage in the future, as I’m a lower rate taxpayer.

    But what can I do? Bust my gut to make it to the higher band – only for that to be lowered in the future to pay for everyone who has bought their lambo’s with their pension and then surprisingly ran out of money?!

    Que sera, I’ll just have to become one of “the elite” – it can’t be that difficult? Can it?!


  4. An epic post deserves an epic comment.

    I like the petrol can analogy – but at petrol stations they actually dictate which containers you are allowed to fill up. If people can’t be trusted not to be stupid with petrol (some even pour it on BBQs) then what hope pensions? Sounds like a recipe for disaster if you ask me.

    Few outside the PF community grasp the difference between income and capital. Lottery winners spring to mind. It’s one thing to save in a company pension for 30-40 years by default, quite another to invest wisely, perhaps for the first time in your life, in your mid to late 50s. Scammers must be rubbing their hands with glee!

    I think there may be all sorts of unintended consequences. Just one example – a retiree could purchase a BTL property and then a few years later remortgage, get a tax deduction against rental income on the extra borrowed money, then invest it at a higher rate of interest in peer-to-peer lending in their tax free ISA. The mind boggles!

    You might have seen my comment on the Monevator article. You often talk about capital getting stronger and labour getting weaker. So we have a budget that extends the 0% tax band on rentier income while PAYE/NIC on earned income is still 32%/42% plus tax on travelling to work (and not including the 13.8% employer NI). Shouldn’t the government be helping the labour side of the equation? How is an employee ever going to find the money to fill their ISA allowance?

    As for inheritance tax, perhaps I could see an argument for increasing this if it was age-dependent. Otherwise children orphaned while still young are going to be financially as well as emotionally screwed. If I live until they finish their education and buy their first house I can help them. If I die young then the government gets all my money and they have to support themselves. Random and unfair in my view.


  5. @Reue I think you have it about right on the pension amount – since early in your working life there are so many other claims on income that it would be madness to not acknowledge that in a lower pension allocation then. FWIW you show more nouse than I did then – the one thing I got right was the values inherited from my parents of never borrowing against wasting assets. The failure to understand and engage in the way you are doing cost me dear! I tip my hat, sir 😉

    @Greg in the short term there will be few DC pensions coming out. And anyone with a DB pension thinking of converting to a DC to get the Lambo should be rugby-tackled to the ground and beaten over the head with a wet fish until sense returns. But it may become a problem, given the numinous nature of property in the British psyche. Conway’s blog is a cracking good read, I see that his post on housing shows it isn’t a stellar asset class. The hurt that’s at the moment is because wages are not keeping up with inflation, though I note his house price to earnings ratio is below 5. I was damn fool enough to buy at 5, so there’s precedent for it being higher 😦

    @Dom, dunno if it helps but I still recall sitting in the BBC Broadcasting House bar when I was 28 drinking pint after pint of ESB to forget I could never buy a house and all the greybeards had all the money. It turned out a lot better than it looked then, though I appreciate some things have changed for the worse, though by no means all things.

    Your dividends are still taxed within an ISA, BTW 😦 But yes, there’s a case to be made for the ISA route for a lower rate taxpayer. You can switch that to a pension as you get older. Or run it down on living costs as you salary sacrifice into a pension.


    quite another to invest wisely, perhaps for the first time in your life, in your mid to late 50s

    erm, cough 😉 I haven’t been slaughtered yet… Is it not madness anyway to hook out all the wedge invested in a personal pension, say in Vanguard LSwhatever, pay 45% tax on it as our Lamborghini man above, then invest it in ISAs, or, God forbid, unwrapped? Why not draw it down, or perhaps hook out the 25% PCLS, do the cruise if you have to and then ISA that? The latter broadly what I am going to do, I explicitly targeted my AVC savings at the 25% level.

    Few outside the PF community grasp the difference between income and capital.

    Not all inside it either. I haven’t really got my head round that – all massive big numbers that you have to divide by 20 to keep the Lamborghini moment away. And it still feels horrible running some of the cash down though analytically it is the right thing to do. So agreed, there is a hazard of a lot of foolish behaviour due to a lack of experience and understanding. The Aussie data seems to indicate that’s not as bad as it might be, but I don’t know what the religious status of housing and BTL is like Down Under compared to here.

    So we have a budget that extends the 0% tax band on rentier income while PAYE/NIC on earned income is still 32%/42%

    In all fairness if you’re relying on the 0% savings amount a) you don’t have a whole heap of income – £15k p.a. max? and b) you’ve been doing your bit to pay off the National Debt/slightly weaken the deficit by having the capital value of your money devalued, both explicitly early in the financial crisis and implicitly by the high inflation/ZIRP policy of financial repression. The remarkable rise in the personal allowance from £6.5k to about £10.5k is also a decent lift for the labour side of the equation of £800 p.a.

    I’m not advocating that the power shift from labour to capital is a good thing. It’s an observation, it’s a secular trend that caught me on the hop and it’s worth calling out because that sort of change is hard to see. I don’t know if a political solution is possible. But it’s a danger, and a serious one unless you’re brilliant at something. Most of us aren’t.

    Re IHT, I don’t know what the right answer is. I think Hell will freeze over before it’s changed. The aristocracy struck a deal with the post-war governments of the 1960s and 70s that agricultural land is IHT-free, which is one of old money’s wealth stores of choice. The ostensible reason for the exception was it would break up family farms, but what has happened is this ancestral wealth store is consolidated and rented out to contract farmers on a huge scale. No IHT, some income from the store of wealth and to add insult to injury we pay subsidies to keep it that way and encourage unsustainable farming practices and occasionally helpflood our towns and cities. Without IHT 69% of the land is owned by the same families that owned it 200 years ago. This also has some bearing on the house price problem. That’s the trouble with the modern world, there are so many more bloomin’ serfs than there were in the old days, and they’re uppity to boot.

    There’s no IHT between spouses to the best fo my knowledge, so that could be extended to dependent children. Or life insurance used to manage the risk. The general principle that passing ancestral wealth through the generations is somewhat anti-democratic and meritocratic was also an observation – if we in Britain like it the way it is then that’s fine too 🙂


  6. Great post ermine, I learn a massive amount from reading you.

    I’m another mid-50s person with a fair wait for my final salary pension and hoping to fund the 6 years from 60 to 66 so that I can stop work.

    I’ve given myself a crash course in DC pensions over the last few days because the budget changes do look like a fantastic opportunity to boost the pot of savings that I will be able to take at 60, rather than have them tied up till I don’t really need them any more (ie at 66).

    I’m walking quite a fine line with what I’m expecting my ISA to do already, so I can’t really afford to make a mistake but still I think it looks well worth a go so I’m going to revive a CIS FSAVC I’ve been drip feeding for years and hope that does the trick.

    Those CO-OP salesmen who flogged me it 18 years ago despite the fact that I’d just started work at the Council, might turn out to have come up trumps after all.


  7. You mention BTL in Australia. I lived there during the 1990s and it was quite normal for people of my age (I was in my 30s then) to own a unit (Aussie for flat) that they rented out. What’s more they would have more than likely have already cleared the mortgage, partly because it’s paid fortnightly (so 13 months a year) plus overpayments weren’t limited, if my memory serves me right.


  8. @ceridwenn you could also consider taking out a DC pension as well, leaving the FSAVC as is. There are some pros to being able to take out different lumps over different times. Say, f’rinstance you paid into a DC pension over the next five years or so, then you could draw that tax-free in one lump if it didn’t exceed £13k and you weren’t working. If that and running down your ISA is enough to live on then you could take your CIS pension is a measured way over the next few years. Obviously DYOR – these are all new opportunities and highly dependent on individual circumstances. There’s certainly lots to digest!

    @Possum crikey, no wonder it’s called the Lucky Country if people become mortgage free in their 30s! What a sensible bunch of people they are. Rather than bidding up the price of houses to stupid levels and patting themselves on the back that they are now rich while moaning their kids can’t get a start in life like we do it seems Aussies spend the money on the basics, pay down the mortgage and then presumably enjoy life 😉 Hats off to them!


  9. I fully agree that getting into that 1% is tough. I have what I consider a very well paid job however the current state of the tax environment in this country discourages me to continue along my current career/earnings path. I can slog away for another 30-35 years only to see the government rape me of my pension pot and not really be much better off.

    Instead I see the only way for me is to try to take advantage of NISAs (less susceptible than pensions) and the BTL bubble successive governments have blown. The risk of future changes to the pension system are to me far too great. It’s a shame really because I want to save and plan for my future (and currently have the income to do so) but am discouraged from doing so.

    Great article by the way, on many topics!


  10. @UTMT that government risk is a real pain with pensions, so many cultural norms can change over 30-40 years, as well as the financial system. It’s a bummer that you don’t feel you can hedge your best even a bit with pensions as they are the best bet for addressing excessive tax. I had an intemperate rant on HMRC spending more of my money than I was a couple of years ago, I hate to think of what that looks like for you!


  11. Thanks Ermine, I also get a lot of great info from your blog, coupled with currently reading “Your Money or your life” bought second hand off E-bay off course. Where to start…

    Inheritance Tax: It is the first, top of the list tax I would introduce under the Starla manifesto. It’s unearned wealth of the highest order. The recipient doesn’t work for it. The majority of inheritance wealth is property, and the benefactor didn’t work for that either. Chances are they bought their house for £3k in 1967 and hey presto, through the wonder of record breaking HPI, it’s worth 100+ times more. So while I’m grinding it out every day in corporate world and getting taxed for my efforts, I’ve got a short fuse towards people being gifted lottery wins and complaining about parting with any of it.

    I’m really not sure what to make of this pensions lark. My knee jerk reaction was YIKES, that interest only timebomb I was relying on to dampen down the housing market will be curtailed by the feckless using lump sums to pay off mortgages. On reflection I’m not convinced that the type that is sailing into their twilight years with an IO mortgage, would have any sort of meaningful pension anyway. A rush for BTL worries me too, but do retirees really want the hassle of unruly tenants, voids, repairs, dwindling yeilds and uncertainty of BTL?

    Some plus points I’ve taken away from this is I managed to do an Indiana Jones stylee forward roll under the Firms pension portcullis by joining in 2007. Secondly, being 44, looks like I’ve just dodged the 2028 canonball.

    Question: My pension contributions state 65:35. I’d always assumed that I was deducted 3% for every year early I left the Firm before aged 60. Please tell me this isn’t now 65 for me?!


  12. @Starla The IHT is a rum old business, eh? It’s only recently that proles get to expect to leave large amounts. While I can understand the desire of parents to induct their kids to a new aristocracy, the fact that in the absence of IHT on agricultural land, 69% of the land is owned by the same families that owned it 200 years ago shows what IHT saves us from…

    I was clearly too harsh on The Firm, now you mention it I was probably wrong saying 2001 – well done in getting in there in the nick of time. If you are 44, now is a very good time to be considering your options about AVCs. You have about 10-11 years to your first capacity to draw the pension, most likely 55. The AVC amount can be taken as 25% of your total pension capital (as a rough summary the capital is 20*your pension projection @ 65. There is much to be said for targeting your savings exactly so the AVCs are 25% or the total. Because the amounts you can save per year are usually limited (‘cos you have to live!) saving that much takes a few years.

    But don’t use anything I’ve said – The Firm runs regular seminars run by JP Morgan called Wealth @ Work – look it up on the intranet. These guys know how The Firm’s pension scheme works and the 1 day seminar is well worth going to, and is free to you (The Firm does it because it wants to encourage people to leave/take VR)

    Your pension will be 2/60th of final salary accrued payable at 60, the remainder will be (date of leaving-2009)/80 payable at 65, as a career average scheme. The shift to 65 from 60 for the NRA hits early retirees hard if they draw the pension early. If I draw early at 55 I lose about 25% of the pension because it’s paid for 5 years longer. If you draw early at 55 you lose ~50% because it’s paid for 10 years longer. Crafty, eh? You can’t take the two parts separately nor can you take the AVC fund earlier if you want to maximise the tax relief on it.

    I can’t recommend highly enough going to the Wealth@Work seminar. JFDI. It’s a mine of information, it isn’t a heavy sell of anything (The Firm pays specifically so this is unbiased), and you can ask any questions of people who know about The Firm’s scheme. Go for the general orientation one rather than the I am going to retire in 6 months with VR version, though there’s a lot of overlap. Because of the stupendous amounts of money involved it takes time to change tack. My express run out of The Firm in three years is about as short as you can do it, and if you take longer you take much less hit to your living standards in the endgame 😉


  13. This is brilliant, thank you. I’m on that intranet first thing. The Wealth at Work Seminar is exactly what I need. As one of my many (misery of) metrics, imposed by my Firm-Boss, is training and learning, then I can use this seminar under the guise of a new found, keen interest in Finance 🙂 AVC’s I absolutely need to get to grips with. Yes, the penalities for drawing a pension at 55 are harsh, but as I regularly struggle to make it to lunch time, then I’m willing to put an acceptable price on reclaiming 5 years of my life back. … And you can never to too harsh on the Firm.


  14. Excellent – go for it. Note that you don’t have to draw the pension at 55 if you leave The Firm at 55. I’m not drawing mine, and I’m getting on for two years out of there. Obviously to do that you need savings, and you should not pay your mortgage down with any VR bung if you are looking to bridge a gap between leaving work and drawing.

    The way the AVCs work with the main DB pension scheme is very unusual nowadays and very much advantageous to you on a tax POV. Go salary sacrifice/SMART pensions and FWIW basic rate taxpayers get a 32% win rather than 20%. Well worth getting to grips with, and unusual enough that most IFAs will say AVCs? That’s so 1990s, SIPPs are where it’s at? They are wrong in the case of The Firm. And W@W will show you why.

    If you want a preview go to and insert in lower case the commonly used short-form acronym for The Firm after the / 🙂 Even if you read the slide pack go to the seminar, because everybody’s situation is different

    W@W will do a very low-key trawl for business to service your savings. Although their seminar is excellent, and I’ve heard good reports of the free follow-up one hour one on one advice, they are finacial advisers. Take a look at Monevator’s line on finacial advisers beforehand. However, I must say that the guy at the seminar I went to played an absolutely straight bat – they openly said that of course selling follow-up advice would be nice, but since they’re paid for by The Firm you are absolutely not obliged, and the follow-up one to one is nto obligatory and has no pressure.


  15. As well as working well from a tax perspective I think AVCs also work well in terms of tax free cash. Often the rate at which DB schemes convert pensions to cash is much lower than their current cost.

    With a big enough AVC you can take the tax free cash from there leaving the full DB benefit untouched.


  16. @David – you are right – this is exactly my policy. I targeted AVC savings of (annual pension@NRA/20)/3 which means the AVC fund ends up 1/4 of the nominal pension capital value which is pension@NRA/20. Which coincidentally is the value of the 25% tax-free lump sum, which I can take without, as you say, converting any of the pension.

    Apparently not all AVC schemes associated with a DB pension can take the capital value of the main pension into account. In which case they act like a FSAVC or the modern equivalent, a SIPP, where you can take 25% of the FSAVC/SIPP fund as a tax-free lump sum.

    There are very few opportunities to earn that much money and eventually get it into an ISA over a few years without paying any tax at all in a perfectly legal way. It was transformative in my case.

    Although pensions are horrendously complex and as dull as ditchwater, anyone in their 40’s onwards would serve themselves well to learn about the opportunities. Not paying 42% tax/NI makes a lot of things possible that weren’t otherwise


  17. What an excellent article!

    I too thought that there might be an uptick in BTL as we all know that the Brits just lurve their property but maybe it won’t turn out that way.

    Like you, I was lucky enough to join a Final Salary scheme (which closed just months after I got in) with a 1/60th accrual – but these pensions are rarer than hen’s teeth these days.

    The tax benefits of pensions are worth having though, if you get 20% relief on the way “up” then a couple could go under the £10k threshold, and with everything paid off £20k should be perfectly decent, with any extras coming from the ISAs.

    I need to get the OH sorted out with a pension!


  18. Excellent stuff ermine. We’re doing the pension versus NISA thing next week, and The Accumulator reckons there’s no contest. But he is sanguine about government changes.

    It’s true they can’t make them too terrible or nobody will use them. To be honest I’d say over my lifetime they’ve actually made them better on the whole, aside from Gordon’s tax raid a decade ago.

    (The demise of workplace pensions was clearly a net loss to the workers but that had to be done really for economic reasons due to people not dropping dead at 66 anymore, and many more of us being middle class, with a dash of globalization).

    The obvious caveat is the raising of the retirement age. But again I can’t see that there was much choice about this, and to be honest I’d prefer it to the alternative of it having to be lowered because we all had some dread new lurgy and were falling over at 50. 🙂


  19. Hi Ermine – first post from a long-time lurker.
    I too read about the pension changes with some interest, but unlike you, I decided to bite the bullet this year and put £2880 into a SIPP from Hargreaves Lansdown. The annual fee of 0.45% is tolerable, and on exit, there are no fees to set up drawdown, nor for regular payments. There is a £25 fee for one-off payments. My general plan is to sink £2880 into the SIPP for ~4-5 years, then to extract the money over 1 or 2 years as my primary income in those years, thus incurring little or no tax.
    But I fully expect both the charges and rules to change continuously (remember Continuous Improvement?), so I’m fairly relaxed about what the situation might be in 12 months time, much less 5 years. I just couldn’t resist free money from HMG.

    BTW, opening the SIPP with HL took about 5 minutes, and was entirely an online exercise (I already had a trading account with them). So there’s still time to change your mind! After all, what can go wrong……

    (And for context, I’m 51, took early retirement from the Firm last June, have a deferred pension, and live about 2 miles down the road from you. Sound familiar?)


  20. @misterquirrel > I need to get the OH sorted out with a pension!

    ASAP I’d say, you have until the 5th April to get some in this year 🙂

    @Monevator, indeed – I don’t think pensions can be ignored any more. I really struggled to create a narrative that would do justice to the complexities of the subject. The most transformative uptick for DC pensions was pensions A-day in 2006, because you never _had_ to take an annuity on retirement after 2006. The rates are so poor that it makes sense to stay with capped drawdown on some equity/bond mix until you get old enough for annuity return to improve – they’re a lot better at 75 than at 55. But people hated the thought. You and TA have a hell of a job to unknit this spaghetti for people, look forward to seeing it! There are still a lot of wrinkles, such as this one I missed –

    @Boardgamer I’ve just simulated what opening a TD SIPP (I have an ISA with TD so hopefully wouldn’t have to go through the money laundering postal verify hoo-hah). You’re dead right, if I open one now and lob in £2880 and do that for three more years (ie four in all counting this year) then I get ~£14k and a real ROI of 4% p.a. on cash if I assume 3% inflation and after I knock off all the charges. I can then extract the entire £14k pension + PCLS wholly tax-free after April 2016, assuming a £10.5k personal allowance by then. Possibly taking a runt £1k after April 2017 and taking The firm’s pension late enough in the year I pay no tax the first year. That maximises the value of by five years impoverished non-earner non-taxpayer status

    Put that way is seems a little bit rude not to take up the offer of free money, so I will see if TD will take me on online. Thank you for the info that using an existing provider is so much easier 🙂 And yes, the rules can change and I may take a stiffing, so be it.

    Another L2012 escapee, eh – small world 🙂


  21. re: “I fully agree that getting into that 1% is tough.”

    yes, it’s unrealisitic to get there from just a very well-paid job. but then the next 10% is doing quite well, too. it’s the last 90% who aren’t doing so well. (er … that adds up to 101%, but you get the idea :).)

    it is a bit of a gamble (on regulatory change) to put nearly all your investments into pensions, even when the initial tax relief is 40% or more. so don’t do that! split your investments between pensions and ISA/unwrapped.

    there’s nothing wrong with paying paying a bit of 42% (or even 47%) tax (that’s counting income tax + employee NI), and investing the net income. it’s not like when tax rates went up to 80%+.

    plenty of options for high earners, IMHO.


  22. … by way of a follow up, I’ve nearly finished my homework. The W@W Seminar isn’t being offered at The Firm at the moment. I spoke with a nice lady in the pensions dept. who confirmed this. I’ve been targeting co-workers that look about late 40’s/early 50’s for a bit more AVC insight (anyone with a spec of grey or a stressed look will do) and it’s amazing how few of them know very much about it. Perhaps that’s why they’re all still there? The ones that get it are wandering around Suffolk looking for black cars covered in dust. So, I’m armed with The Firms AVC guide, and think I may go for a low risk No.2 option at 10% of my base salary. I’m an office prole, just skimming the under carriage of the 40% tax band, so not such a big break for me there, but a break nonetheless if I use it as a 25% lump sum, and leave my DB pension alone. I *think*. I have much to learn.


  23. @Starla Remember that if you use Smart Pensions (a.k.a salary sacrifice) you get to save NI as a BRT taxpayer, which is a 32% bump up, not 20%. The maths is –

    you live without £68 of your take-home pay (ie that’s how much your net salary drops). They put £100 in your AVCs. Your profit is therefore £32 out of £68. You would run, climb over people and sharp-elbow them out of the way to get a nearly 50% boost on a savings account these days 🙂

    BTW I believe you have to leave your AVC fund deferred until you take your main pension.

    Although the AVCs are the biggest bang for your buck, you are also entitled to open a SIPP which is now possibly useful instead of/as well as. You can do both. Sharesave may give you the opportunity to do well with that.

    That is advantageous in a different way. You eat an actuarial reduction in The Firm’s DB pension of roughly 6% a year that you draw it early. Put that another way, for every year you defer from 55, you gain an inflation linked 6%, though you may run into BRT tax which knocks that back to 5%

    Build up a DC/stakeholder/SIPP pot of money of say 13k. That will only cost you ~9k. At 55 draw the SIPP altogether tax-free (see this article and Boardgamer above. However, since you won’t be able to get it in this tax year, wait until Osborne’s changes are confirmed by Parliament – you have up to February next year to sort it out.

    At 55 take the SIPP as a lump sum tax free, and live off it. If you get VR you can play this game with your redundancy money – save more in the SIPP and draw it down over a couple of years (you could save ~25k for the price of £19k then, though you MUST do all but £2880 in the tax year you are still employed).

    You get to defer your main pension by a year, effectively buying an inflation-linked spouse-assisting annuity of ~6% of it for ~£9000. As long as the increase in your DB pension over the year is > £450 (£9000/20) you are quids in, you ain’t getting an annuity like that cheaper at 55 from anywhere on the open market 😉

    Bummer about the W@W. I take it you’ve, ahem, accessed the slideware from the link above, I checked and it’s still there, and updated. It’s under ‘your seminar’ and the general one is ‘getting on track’

    If you have sharesave coming out this year you may be well placed to use some or both of these pension options. the W@W slideware has a piece on how to avoid CGT issues on sharesave which is worth a read.

    The AVC can be invested ISTR in Standard Life managed cash, L&G FTSE100 and L&G Global:FTSE100 50:50 If you’re retiring in < 5 years there's some case to be made for the cash option – as a rule of thumb you shouldn't aim to be in the stock market for < 5 years.

    However investment policy has to reflect your specific views and goals…


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