Pensions? Not for me, thanks.

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For decades pensions have been the go-to option for financial advisers; helping plan their client’s retirement lifestyle. But not for me.

If we take a step back and ask: “what is the fundamental objective of the client?” It is not to have the biggest pension fund, but to accumulate sufficient wealth to fund the lifestyle they aspire to in later life. 

That’s it. Nothing to do with pensions.

As the world is so full of uncertainty, why do advisors feel that investing their client’s regular savings into one of the most uncertain investment solutions currently available is such a good thing to do?

A decade ago the client expected a 25% tax free lump. Under the radar, HMRC changed this title to pension commencement lump sum (PCLS). The word tax free has gone and you have to ask the question why? 

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In another decade, this term will have been forgotten by the new financial advisers coming through, and HMRC will then be able to restrict the amount of cash available tax free back to clients, to perhaps a minimum fixed amount.

The HMRC has also targeted increasing the tax on pensions in other ways. Those that have been successful in their careers or have saved fugally for their retirement years have now been taxed with the lifetime allowance. 

Whilst initially reaching a reasonable £1.8 million allowance, the continued reductions in allowance and the now stagnated limit of £1.073 million has left many savers on the threshold of major unexpected tax bills.

And yes, I hear those in the press who market pensions highlighting that the HMRC offers generous tax reliefs, but is this worth it?  

HMRC continues to tinker with the pension rules, creating an environment of complexity, with those who are unable to grasp the continued rule changes and the impact it may have on their retirement. 

Surely if the government wanted to encourage long term savings it should be simple like ISA’s. Save to a maximum amount per year and everything is tax free; and you have full liquidity when you want it.

At the moment we all know that HMRC, because of the Covid pandemic, will now have a free hand to increase tax on the public without impunity. No longer will it be an election buster. 

Therefore whilst basic rate tax relief, currently offered at 20%, may be considered by the industry as a benefit, I foresee basic rate tax of the future, being 25% or 30%.  

The baby boomers will retire and the younger generation will have less jobs and less opportunities as technology takes over our lives, and it will at an alarming rate.  More citizens living longer being supported by a smaller working population is no good place to be. 

Therefore 20% tax relief in 30% tax out, does not add up. 

There will be those who argue “who knows what the tax rules will be in the future’?” and that is my point!

Why risk investing in pensions, when there are other, more transparent opportunities currently available?  

What we do know is that the tax rate is unlikely to go down. 

So why risk having your money, and therefore your lifestyle, being controlled by some unknown in the future?

To talk about your pension or request a second opinion on your current portfolio, please contact me today.

The author of this book explains that most financial advisers and institutions do not operate in the best interests of the clients, but to maximise their own profits through exorbitant fees. The actual percentage charged may appear relatively low but compounded can knock tens of thousands off your final pension fund.

Along the way you are likely to be taking unnecessary risks through the lack of diversification of your portfolio. Fund managers in their efforts to meet market indexes and targets end up adding more costs to their clients through regular transaction charges.

The book provides a number of practical illustrations of the effects of fees, transaction charges and risks on investors. Definitely a read for all investors not just company Directors.

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