I’ve had another spat with a couple of Pension Advisers over on Twitter in recent weeks; a nice gentleman asked a question about his pension and a few people included myself responded with a few points and a couple of options. There was a massive sticking point when the subject of Pension Charges and Pension Tax relief came around – and of course I had to get involved.
One of the ‘industry professionals’ insisted on trying to call me out as a fraud – which is not a good look, for him. Everyone knows I don’t make statements I can’t support and most certainly wouldn’t dream of then putting them in writing – not even on Twitter. See, I am honest about my position and my knowledge. If you dare go search on Google or just look at my Twitter feed you’ll note that I do tell the truth.
If I make a comment about pensions, pension charges or pension tax relief it’s because I understand the truth about a situation and not because I think it’s the truth. Belief in pension charges being low is not the same as – pension charges being low. And most pension owners don’t know what the charges are on their pensions. It’s madness.
So the real point of this short article is to make a point about the effect of charges on your pension planning and the true benefit of tax relief on that pension and your contributions.
The following statement seemed to rattle the ‘industry professional’ which made me smile because – the truth is the truth.
Pensions are not tax free, they are deferred income. In that at some point, the contributions you make to your pension are going to be taxed, in the main. This means that ‘the bulk of your withdrawls from your pension are going to be taxable, and you will pay more in income tax when you draw on it than the value of the tax relief you got when you invested. Read that again, make sure it’s clear in your own mind.
The Government does provide you with a tax relief credit, which is a effectively a loan. You can then invest that money until you get to your retirement age, any money you make on the Government loan (Pension Tax Relief) is yours to enjoy – but you will have pay income tax on lions share.
No matter what you have been told, this is the truth.
The main beneficiary of Pension Tax Relief are…. Wait for it.
- Pension advisers – those who advise on pensions
- Pension providers – those who provide the pension wrapper
Phew, I said it;.
No matter how much tax relief you get on your pension contributions it will all go in charges and adviser fees, even if you manage to secure a low cost pension you will see at least 1% of your fund go in product and fund charges (that’s ten percent every ten years) and your adviser fee will be at least .5% (half of one percent) which equates to 5% of your fund every ten years – and you are immediately going to be down by more than the amount of tax relief given. Instead of the line the industry uses – ‘it’s a gift from the Government’.
Note, your Pension Charges are based on the value of your fund and any tax relief is based on your contributions – long term you are never going to win unless you are very careful.
There are other reasons you’d consider holding funds in a pension – but be wary of these as ‘points of advice’ most won’t apply to you.
Lets look at the maths of pension tax relief.
You make a payment of £1.00 into your pension, as a basic rate tax payer you get tax relief on that investment immediately worth £1.20.
Now, when you come to draw in that £1.20 you’ll find that you can take a lump sum cash payment of twenty five percent (25%) of the fund which is £0.30p leaving £0.90p fully taxable.
The balance £0.90p after basic rate tax becomes £0.72p add your £.30p tax free cash you are left with a total (after the event) of £1.02p before any charges for advice have been made. Of course, it’s not possible for you to invest into pension without charges – let me know if you find one.
For most people, you can expect to pay at least 3% (three percent) in initial charges meaning the actual effect of making a pension contribution is a loss of just under a penny. Every pound of pension contribution you make ends up costing you at least £0.01 – sure, having worked in the industry for over thirty years it surpised me as well.
We know that pensions are a long term investment, often for thirty of forty years. This means that your pension fund is likely to grow – although that’s not guaranteed. But the charges deducted are guaranteed – to be deducted.
The adviser and the pension provider want you to think that you’ll be quids in by investing in their advice or their pension contract – real world – they are guaranteed to be quids in, and you, well maybe. You won’t actually know if it was worth the investment once you get to the end of the plan. You are effectively buying a promise that at some future date, the pension provider will, hopefully return to you, your money with interest and you’ll be better off.
As a short aside, lets consider how profitable pension company’s are.
- Aviva £20bn
- Standard Life £10.6bn
- Pheonix £3bn
- Prudential £47bn
- St James Place £5.6bn
All of these providers are major players in the pension industry. Pensions are important to them because they get to manage your money for long periods of time – which makes their business more secure, the more complex the product – the less likely you are to switch it out. Most people don’t understand money – and the industry knows it.
Of course meanwhile you hope that pension legislation won’t change.
https://www.portafina.co.uk/blog/The-Pension-Timeline shows that there have been over thirty changes to pensions in recent years – if history only repeats itself at half the rate it has in the past you’ll see at least ten or twenty changes before you retire or die. Expecting the same rules to be in place when you retire as they are now is madness. It’s more than likely they won’t be.
As I finish, let me slay the trolls finally. The pension industry and the advisers that work in it have a vested interest in keeping things the same. Pension tax relief costs the tax payer around £41 billion pounds per year – it’s a direct subsidy – the is a massive benefit to the industry whilst it continues – so nothing will change. As at April 2018 Pension Tax Relief costs every man, woman and child in the UK around £600 per year – all of this goes in charges to the advisers and providers.
There are plenty of options for investment that are more flexible have lower charges (potentially) and will provide with a genuine tax free opportunity to take control of your own money – of your own finances. But the main thing is this.
You need to understand that the pension industry is an industrial giant in the UK – they have got to where they are today because of help from the taxpayer and it’s unlikely to change anytime soon. But you as a consumer do have some options, to invest wisely, at low charges and on your terms.
Moneytrainers can help you do that. You can contact me here
As a final part to this post. I’d like to thank Darren Cooke over at Red Circle Financial Planning
Also David Hearne over at Satis Asset Management and my old sparring partner Al Rush he’s trolled me before all of which have a vested interest in the status quo – as they all benefit from the tax payer subsidy which is Pension Tax Relief. It’s not the first time they’ve tried to make me shut up and I doubt it’ll be the last.