06/06/14Too many choices…so I’ll do nothing!
So, given too many options, what’s the chances of doing nothing? I’d say pretty good actually!
I love going out to eat. My ideal restaurant offers me freshly prepared food, a choice of say 4 starters, 5 Main meals and 4 desserts (for my wife, I don’t do sweet!) give me a menu where it has too many choices & chances are my appetite suppresses & I order the first thing I see & I won’t be that happy with my choice, but I’ll have eaten.
My blog this week is back to my industry & specifically pensions……I know…… strap yourself in, pour a large G&T (as I have done) & ruminate with me…………
When I first came into the Financial Services Industry in 1989, there were two options available at retirement:
Option 1: Invest the whole fund into an annuity & receive an income each month, for as long as you live or:
Option 2: take a quarter of the fund as tax free cash & with the now reduced amount, buy an annuity & receive a reduced income (obviously as you’ve take a quarter out of the equation) each month for as long as you live.
Simple really…Bit like Henry Fords’ quote of ‘You can have any colour you want, as long as its black’
But now we so much choice with pensions (and in fairness, colours of cars…Taupe & Teal come to mind) that for anyone approaching the age where you can access your personal pension -55- planning needs to start at around 50, because every option brings its own set of issues:
Buy an Annuity: well publicised at the moment. This is the vehicle that drives out the income and uses age, health, sex & current interest rates/gilt yields to determine how much someone can receive. Given that statistics show we are in our early 80’s on average when the permanent horizontal position becomes the norm, that could mean a company paying out for close on 30yrs..so the rates aren’t going to be pretty, especially if you want to ensure that your spouse gets some income when you’re no longer around & when you’re both gone any capital still remaining reverts back to the company who provided you with the annuity..its a kind of spread betting by the company as to how long they think you’re going to live for, & whether it becomes theirs on the 1st or 2nd death (take a slug of G&T now!) does this work for you? I don’t know, but it will still be a popular choice for retiree’s for Public & Private sector workers because (& I refer to ‘Option 1 & Option 2’) that is generally all they are aware of, apart from Option 3 (which may or may not be available) speak to a Financial Adviser, which is seen as a major pain somewhere low down on our bodies.
Choose an alternative: Good one Vic! Look, I’m not going to highlight the minutiae of everything out there..The sun is shining, the G&T will go warm but lets have a whistle stop look:
First off, lets clear up this tax free cash issue, you do not have to take a quarter or zero. If you want to take 10% this year, next year then 5% thats’ fine, or 5% over 5yrs..you can take a quarter of your pension as tax free cash..how you take it, is up to you & subject to your pension provider being able to accommodate (look, I’ve got to cover things…take a sip of G&T!)
If circumstances provide favourable, you can (subject to being in a suitable scheme that allows) take your cash element & defer taking an income until some future point. This could work well if you’ve retired but any more income in the same tax year, will take you into the next tax threshold, or if just want to be in charge as to how much & when Income is payable. You can get guarantee’s as to how much is received each month, & because you haven’t purchased an annuity, on the death, the remaining fund passes to your next of kin subject to tax charges & can also be part of your estate, but subject to Inheritance tax as well. The remaining fund will still go up & down in value whilst you’re alive.
Given George Osbornes’ budget statement, you can, from April 2015, tax your whole fund as cash. 25% will be deemed free of tax, but the remaining fund will be classed as ‘income’ & taxed accordingly. so, if you’ve say, £50,000 in your pension. You take £12,500 as a tax free cash lump sum, the remaining £35,000 is classed as income you’ve earnt. So if you’re earning say £25,000 per annum, for that tax year you’re earning £60,000 and are now a higher rate tax payer at 40%, so the £35,000 fund remaining is reduced to £21,000. Far better to consider taking it a bit at a time, using your full 20% tax allowance. But what happens then? You’ve done you’re pension in & now there is only the state pension too look forward to ..but that doesn’t kick in until say 68 & you’re only 55 now?
I’m labouring here but you get my drift. Every pension action has a reaction & no two peoples’ situation will be the same. I mean, we know that once you’re in an annuity you can’t get out (you didn’t? take a swig!) but you can now defer the age when & if you choose to buy one, so the combinations & options are huge. Please don’t do nothing-do something & speak to me! I don’t bite & I do offer a free , no obligation first meeting (& relax….!)
Mortgage bubble…Don’t Panic!
I read with interest comments from papers like the Daily Nail & Daily impress & from top notch business editors like Bob Weston (names have been changed!) that the Monetary Policy Committee need to raise interest rates to cool down this housing bubble..or that house prices set to soar..or that its all bloody doom & gloom for everyone……
I agree that prices have soared that there is & always will be certain parts of the country that are immune to house price fluctuations, but…with big retailers (like Tesco’s for example reporting lower profits & mortgage approvals down for the ninth month in a row & continuing to go down due to new ‘MMR’ rules (nothing to do with vaccinations) where things like Student Loans will be taken into consideration for mortgage borrowing, I forsee a calming of the seas…I also can’t see how, as we are seeing a recovery of sorts in the ‘Macro’ arena, (big industry, financial markets, unemployment) they would raise interest rates now-especially with a run up to an election. This is highly unlikely-in my opinion.
I suppose I could see a 0.25% rise late this year, early next, just to see what the reaction is, but as we are the world cup winners for the population with the most debt (see, we can win something) I don’t interest rates rising until Q1 next year & listening to financial industry leaders, an expectation of base rate in 2017/18 is to be around 3%
As always, these are my own thoughts & views & not to be taken as advice..I’d be happy to advise to you..just visit www.business-ifa.co.uk have a look around, & ping me an email or give me a call. feedback is always welcome.
Have a great weekend,
Victor
