Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Maren Talk
Speaker 1: to Your Money, the personal finance edition of Maren Talks Money.
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Speaker 1: for making the most of your money. Hi marin sum
Speaker 1: Set Web and with me today senior reporter of Money
Speaker 1: Dessert author John Steppeck Hi John, Hi, maam. So this
Speaker 1: week we are answering a question about pension drawdown from Mike. Hi.
Speaker 2: My name's Mike.
Speaker 3: I'm from Suffolk and my question is about pension draw down. Basically,
Speaker 3: what's it all about?
Speaker 2: And most importantly, how do I avoid getting ripped off?
Speaker 1: Great question, Mike, but do you know what? John and
Speaker 1: I were not quite good enough to answer that one,
Speaker 1: so we have ordered some extra help. Tom McPhail of
Speaker 1: the lang Cat for eighteen years, he was head of
Speaker 1: Policy and lead pension spokesman from the investment platform Landsdown.
Speaker 1: That's where we first came across each other, isn't it Tom.
Speaker 1: In twenty twenty one he conducted an external review of
Speaker 1: money and pension service on behalf of the DWP, and
Speaker 1: he has now worked for the Langcat since twenty twenty one. Right, Tom,
Speaker 1: brought down, complicated, frightening. But before we get to it,
Speaker 1: I want to ask you if you don't mind a
Speaker 1: little bit about the budget. We know that all governments
Speaker 1: want to take more money out of people's pensions because
Speaker 1: that is where the money is. There's a lot of
Speaker 1: money tied up and pensions in the UK and if
Speaker 1: you were a government looking for something to tax, you'd
Speaker 1: look at that big pile of money and go oh
Speaker 1: like some of that. And this government is no different.
Speaker 1: And of course a lot of people think that pension
Speaker 1: tax relief is already too generous, so there may be
Speaker 1: some changes coming. What might those changes be and how
Speaker 1: much should we worry?
Speaker 3: Yeah, really good question, and we probably should worry. There
Speaker 3: In Rachel Reeves and Clear Starmer have been channeling there
Speaker 3: inn at George Osbourne with a suits on of eel
Speaker 3: mixed in there as well. It's all miserable, doom and gloom.
Speaker 3: You know, we need your money because the last lot
Speaker 3: messed everything up. We can't take it off the workers,
Speaker 3: so we're coming for the rich people with their big
Speaker 3: pension pots. That's the narrative. So yeah, we should be worried.
Speaker 3: I think there are four known unknowns around pension taxation
Speaker 3: and the budgets. I'm just going to quickly run through those.
Speaker 3: So the obvious ones are incotax relief. They can monkey
Speaker 3: around with that. It all all the money goes to
Speaker 3: higher earners at the moment, and so we need to
Speaker 3: do something about that. But it's really complicated and difficult
Speaker 3: and messy, and George Osborne looked at this in twenty
Speaker 3: sixteen and backed off because it was too difficult to messy.
Speaker 3: There's lots of money available there, but you'll burn up
Speaker 3: a lot of political capital if you start messing with
Speaker 3: you incotax relief, so maybe, but also quite possibly maybe not.
Speaker 3: A much easier one to tack on. My second option
Speaker 3: would be the employer's relief on National Insurance on pension contributions.
Speaker 3: Much easier to get rid of, would raise less money
Speaker 3: but still decent five to ten billion pounds a year,
Speaker 3: not nothing by any mean, and much easier to implement.
Speaker 3: So both of those would be very difficult to do immediately.
Speaker 3: You'd have to say we're going to do this, and
Speaker 3: you'll start from next April. Because there's payroll and systems
Speaker 3: changes would all have to be made. But there are
Speaker 3: those two. Third option of my known unknowns would be
Speaker 3: death taxes on pensions, and this is probably my strongest contender. Hear,
Speaker 3: really easy to do. You just stand up on the
Speaker 3: budget then and you say, as of midnight last night,
Speaker 3: anyone that dies from then on, we're going to take
Speaker 3: some tax off the residual funds on death unless you
Speaker 3: pass it to your spouse, and we'll make a spousal exemption.
Speaker 3: But if you pass at your kids, we're going to
Speaker 3: take some of it off you, and we can put
Speaker 3: in a thresholder path a million or something like that,
Speaker 3: and really simple to do, very different to avoid other
Speaker 3: than you know, drastics measures like going to Switzerland Dignitas
Speaker 3: or something. And that seems to be a case of
Speaker 3: the extreme case of the tax tail wagging the lifestyle dog.
Speaker 3: So there's that. My fourth option and the one that's
Speaker 3: really got everybody anxious, and the known unknowns is pension
Speaker 3: tax freelom sum quite easy to tackle. You could say, well,
Speaker 3: really to go for the really rich people with million
Speaker 3: pound pension pots. Currently the maximum amount you can take
Speaker 3: is two hundred and sixty eight seven hundred and twenty
Speaker 3: five pounds. How about we just turn that dial down
Speaker 3: a little bit easy enough to do, it'll only upset
Speaker 3: the rich people. Problems with that though, One died to
Speaker 3: upset the public sector workers again and they don't want
Speaker 3: to do that. Two, it's retrospective taxation and that upsets people.
Speaker 3: And three the tax free lump sum is about the
Speaker 3: only element of pension taxation that people actually understand. So
Speaker 3: if you mess with that, you've got another slew of
Speaker 3: bad headlines about how the government's coming after your pensions again.
Speaker 3: So you could feed it in gently and slowly, but
Speaker 3: then you wouldn't raise enough money. Now, this is the
Speaker 3: most difficult and myt for because it's the one thing
Speaker 3: you could do something about. You could just take the
Speaker 3: tax free lumps on out of your pension now if
Speaker 3: you're already over the age of fifty five. But what
Speaker 3: if they don't change the rules at the end of budget,
Speaker 3: at the end of the month. You know, you're then
Speaker 3: sitting there with a big bag of money that's no
Speaker 3: longer in the tax exempt pension fund and you're wondering
Speaker 3: what to do with it. So no easy answers. There
Speaker 3: are also finally, probably some unknown unknowns, but I don't
Speaker 3: know what they.
Speaker 1: Are well, that's both extremely helpful and extremely unhelpful. Tom.
Speaker 1: Thank you very much. Indeed, I mean well, I'm just
Speaker 1: going to pick you up on one thing. When you
Speaker 1: said at the beginning that it makes sense to go
Speaker 1: after the rich because they get nearly all the pension
Speaker 1: tax relief, they get sixty three, sixty four percent of
Speaker 1: the pension tax relief something like that, I do feel
Speaker 1: I must point out that the reason they get the
Speaker 1: most pension tax relief is because they pay the most tax.
Speaker 1: So that group in the higher and additional rate bounds
Speaker 1: also pay something like sixty nine to seventy percent of
Speaker 1: all income tax, and that's why they get more pension
Speaker 1: tax relief. It's not some special algorithm that fun funnels
Speaker 1: free money to the rich. It's not that I.
Speaker 3: Don't disagree with you. You're absolutely right in your analysis.
Speaker 1: And the other thing I think we should point out
Speaker 1: is about the twenty five percent. Well, it used to
Speaker 1: be that you could take twenty five per cent of
Speaker 1: your pension tax free, right, and that was great because
Speaker 1: it wasn't taxed on the win, and it wasn't taxed
Speaker 1: on the way out. Tachically, one of the only pieces
Speaker 1: of cash available anywhere in any system in the West
Speaker 1: that involves money that isn't actively taxed all the time.
Speaker 1: So that was kind of nice. On the other hand,
Speaker 1: if you're a government, you could look at that and say, whoa,
Speaker 1: hang on, totally untaxed money. That's not right. So it
Speaker 1: makes sense to me that a government of the type
Speaker 1: you suggest kist armas Is would go for that first.
Speaker 1: So yeah, that's the bit I would worry about, luckily
Speaker 1: or unluckily whatever. I'm not quite old enough to access
Speaker 1: mine yet, so it's not on my own mind, but
Speaker 1: I bet it's on the minds of lot as well listeners.
Speaker 3: As someone in the late fifties, I can tell you
Speaker 3: it is something I've given a lot of thought to. Marin.
Speaker 1: Okay, well, maybe maybe we'll do a Twitter poll on that.
Speaker 1: We'll find out how many people are worried about that,
Speaker 1: how many people are more worried about that than they
Speaker 1: are about to see a couple of game sacks, which
Speaker 1: seems to be the thing that people are mostly worried
Speaker 1: about at the moment. Johny, you were going to interrupt
Speaker 1: and say something even more helpful than the stuff that
Speaker 1: Thomas said.
Speaker 2: Well, the one I saying it strikes me is being
Speaker 2: politically easy, if not easy for everyone else, and I
Speaker 2: se very frustrating, but very stealthy the employer. Next I
Speaker 2: think is is you know, because they announced that one
Speaker 2: of the day, half of the ninety percent of the
Speaker 2: journalists covernment don't even know what they're talking about, so
Speaker 2: it never gets into the paper until the end of
Speaker 2: the week. You can hide the fact that this would
Speaker 2: technically affect affect public sector workers too, but you can
Speaker 2: exempt that in a much less overt way than the
Speaker 2: tax free lump sum or then come tax relief, and
Speaker 2: all that happens is that basically either our auto enrollment
Speaker 2: pensions get worse or you know, our private sector employers
Speaker 2: pay more. So that I can see that being very appealing,
Speaker 2: and it is quite a big chunk of change, you know,
Speaker 2: fifty ten billion, because the problem is also if you
Speaker 2: exclude the dB workers from the lump sum of the
Speaker 2: tax relief, the other thing, but the tax relief is
Speaker 2: like a huge amount of income tax relief saving, if
Speaker 2: you like, actually comes from the dB side, not the
Speaker 2: DC side. So if you want to make the sums
Speaker 2: add up there, then you have to include the dB
Speaker 2: workhouse or else is basically okay, maybe it's maybe was
Speaker 2: doing there, certainly nowhere near, you know, because the pension actually,
Speaker 2: if it is constantly quoted, has been worth about fifty
Speaker 2: five billion or something like that. But actually, whenever you
Speaker 2: boil it down, if you start excluding lots of different
Speaker 2: groups from that, then the actual amounts that are sort
Speaker 2: of politically easily targetable are much much smaller. So I
Speaker 2: think that's the other interesting thing about this. It sounds
Speaker 2: like the sort of thing, Oh, why haven't they done
Speaker 2: it already, and then you realize, well, they haven't done
Speaker 2: it already because actually this is a massive, massive mainfield.
Speaker 1: Well I bet my bottom dollar that if any of
Speaker 1: these so called reforms come into play, most of the
Speaker 1: public sect will be exempt.
Speaker 3: We're gonna have to revisit this conversation in a few
Speaker 3: weeks time.
Speaker 1: We are definitely revisiting this conversation, Tom. I look forward
Speaker 1: to having you back on anyway, back to poor old Mike. Mike,
Speaker 1: we have neglected you. I'm sorry. This is about you,
Speaker 1: not about or worries about or twenty five percent so
Speaker 1: pension draw down, Tom, what's that all about? And how
Speaker 1: does Mike avoid getting ripped off.
Speaker 3: So let's just briefly rivisit the bad old days. Before
Speaker 3: twenty fifteen, draw down existed, but it was much more restricted,
Speaker 3: and typically people when they got to retirement would have
Speaker 3: to take their accumulated for retirement savings and hand it
Speaker 3: over to an insurance company in exchange for guaranteed incan
Speaker 3: for life. It gave you certainty this annuity, but you
Speaker 3: lost your capital. So George Osborne decided in twenty fifteen
Speaker 3: no one should have to buy annunities anymore. Instead, everyone
Speaker 3: was free to just leave their money in their retirement
Speaker 3: savings pot what we now call draw down, and just
Speaker 3: draw money out of those retirement savings as and when
Speaker 3: they choose. Through the remainder of their lives. They're still
Speaker 3: entitled to take up twenty five percent of their pot
Speaker 3: tax free, either upfront in one lump sum or as
Speaker 3: a slice of whatever income withdrawals they take. See you
Speaker 3: take one hundred pounds out, twenty five percent is tax free,
Speaker 3: seventy five pounds to tax. And you can keep doing
Speaker 3: that up to the current tax freedom some which we've
Speaker 3: just been discussing in the budget context, which is currently
Speaker 3: capped out at two hundred and sixty eight thousand, seven
Speaker 3: hundred and twenty five pounds or twenty five percent of
Speaker 3: the pot, whichever is the lower. So the joy of
Speaker 3: drawdown is you have control over your money. It remains invested,
Speaker 3: it's growing, You draw on it as much or as
Speaker 3: little as you need for your retirement. The problem with
Speaker 3: draw down is it's complicated. It's really difficult to know
Speaker 3: how much to take out on where to invest your money,
Speaker 3: and how to manage that decumulation of your retirement savings,
Speaker 3: such as you optimize your sound of living through your
Speaker 3: retirement without running out of money before you die, given
Speaker 3: that you don't know when you're going to die. And
Speaker 3: to be honest, most people are not investment experts, So
Speaker 3: where do they put the money to minimize the risk
Speaker 3: and maximize returns and avoid unpleasant things happening. When you're
Speaker 3: accumulating your retirement savings, you're happily sake investment risk, and
Speaker 3: if it goes down a bit, well it doesn't really matter.
Speaker 3: Once you're retired, your perspective changes. You really don't want
Speaker 3: to take investment risk beause when the money's gone, it's gone.
Speaker 3: You've got no more income coming in so it's all
Speaker 3: together a lot more complicated.
Speaker 1: Okay, so you've got all those complications, and then you've
Speaker 1: got this added complication of not really knowing how much
Speaker 1: of your twenty five percent to take ween. I mean,
Speaker 1: you suggested you could just go through your entire retirement
Speaker 1: taking every time you take something out seventy five percent
Speaker 1: of it. Depending on the amount on your pot, obviously
Speaker 1: seventy five percent of it is taxed and twenty five
Speaker 1: percent of it isn't tax. But a lot of people
Speaker 1: think they'd really like to take something out of the beginning,
Speaker 1: they want to pay off a morga, do' give some
Speaker 1: money to their children or whatever it is from this
Speaker 1: tax free lumps on, and then they're down to well,
Speaker 1: maybe they're taking out ninety percent tax and ten percent
Speaker 1: not tax, and I even I find that kind of confusing.
Speaker 3: Yeah, absolutely agree with you. And look, I'm probably more
Speaker 3: familiar with this than most people are. I'm still using
Speaker 3: a financial advisor to help me plan all of this,
Speaker 3: partly because I've got better things to do with my life,
Speaker 3: but also because it's really helpful to have an external
Speaker 3: objective person helping me to optimize my tax strategy and
Speaker 3: so on, and I'm not drawing my money yet, but
Speaker 3: I will do one day soon. For me, I find
Speaker 3: it easier to use a financial advisor to do that,
Speaker 3: but they cost money, and not everyone wants to pay
Speaker 3: a financial advisor to manage their money for them in retirement.
Speaker 3: So then you're into realms of Okay, who's going to
Speaker 3: actually look after my money for me? And then you're
Speaker 3: you're into the realms of an investment platform such as
Speaker 3: the guys I used to work with at Harbury's Landsdown.
Speaker 3: Other platforms are available, quite a few of them are
Speaker 3: cheaper as well. And then you're going to decide where
Speaker 3: you're going to invest your money on the platform, and
Speaker 3: you're going to use active managers, you're going to use
Speaker 3: passive managers. How do how do you optimize your returns
Speaker 3: forst minimizing your risk because you don't want to particularly
Speaker 3: volatile investments. You want consistency of income stream to pay
Speaker 3: you that income you're drawing from your retirement savings. And
Speaker 3: you know you've talked a bit about the tax strategy
Speaker 3: and how you minimize the amount of tax you're paying.
Speaker 3: I'm not pretending any of this is simple. There are
Speaker 3: tools out there you can use. We're starting to see
Speaker 3: FinTechs coming to the fore and offering services to help
Speaker 3: people do this. As a company called Guide with two
Speaker 3: Eyes in the middle for some reason, they've got some
Speaker 3: quite nice technology that helps you do all this kind
Speaker 3: of thing. And the FAA is trying to help those
Speaker 3: platforms the likes of Hardbrea's fans that are mentioned twice.
Speaker 3: Now we've got to stop doing that and others who
Speaker 3: are going to bring in more kind of guidance to
Speaker 3: help customers as they manage their money through this process.
Speaker 3: But I don't think it's ever going to be simple.
Speaker 1: Okay, do you have to move your money? I mean,
Speaker 1: let's say, for example, your DC pension is with a
Speaker 1: VIVA with one of the big life insurance or something
Speaker 1: like that. I have a variety of mini dcs all
Speaker 1: over the place. One of them, I'm pretty sure it's
Speaker 1: with a Viva, possibly one of the worst, who knows,
Speaker 1: we'll check later. But once you get to retirement age,
Speaker 1: will they just keep that for you and manage it
Speaker 1: for you? Do you have to go off to a
Speaker 1: platform or can I just say to a Viva? This
Speaker 1: is really making my head hurt, just give me some
Speaker 1: money every month.
Speaker 3: I'm sure they would be delighted to help you with that.
Speaker 3: And Viva is one of the other financial institutions that
Speaker 3: definitely does offer a drawdown service, so so yeah, you could.
Speaker 3: They would manage that transition for you and help you
Speaker 3: just draw income from your retirement savings as you wish.
Speaker 3: So most of the big life insurance companies and the
Speaker 3: investment platforms they offer these kind of drawdown is And
Speaker 3: in fact, the DWP has just noticed the fact that
Speaker 3: all the big occupational pension schemes, the master trusts and
Speaker 3: the schemes run by employers, don't do this. And their
Speaker 3: approach hitherto has been to say, look, Mary, you've got
Speaker 3: to retirement. Well done, here's your bag of money, off
Speaker 3: you go, don't spend it all at once. And they've
Speaker 3: sort of woken up to the fact that it's a
Speaker 3: suboptimal real situation, and so they're now looking at bringing
Speaker 3: legislation to require all pension schemes to offer what they
Speaker 3: call guided to cumulation sort of default retirement income solutions,
Speaker 3: but no one's got as far as yet working out
Speaker 3: exactly what that will look like.
Speaker 1: You see, that makes me feel a tiny bit uncomfortable, actually, Tom,
Speaker 1: because one of the pros of the DC pension system,
Speaker 1: the New Order and ROMA DC pension system, is that
Speaker 1: people are at least at one point forced to engage.
Speaker 1: And you know, you talked about the old days earlier,
Speaker 1: and in the old days, your pension accumulated somewhere vaguely
Speaker 1: out of sight. It wasn't really anything to do with you.
Speaker 1: And then you got to the point of retirement and
Speaker 1: you had a sort of one and a half hour
Speaker 1: meeting with someone or you look, you received a letter
Speaker 1: and you ticked a box and someone provided you with
Speaker 1: an annuity, and you were You didn't have to engage, right,
Speaker 1: it was all done for you by big, faceless financial organizations.
Speaker 1: And if we get back to the point where you
Speaker 1: have an auto enrollment pension, which you really don't have
Speaker 1: very much to do with, I mean you could, but
Speaker 1: most people don't. It just happens out of sight. And
Speaker 1: then there are default options for draw down instead of
Speaker 1: having the you know, the new marvelous world of fully
Speaker 1: engaged financial semi. I was going to say, semi experts.
Speaker 1: That's absolutely not true. People who understand what's going on
Speaker 1: with their money are engaging with the financial industry. We're
Speaker 1: back to the old days any day now and the
Speaker 1: government will be requiring everyone to buy an annuity.
Speaker 3: Well well, and don't joke about that, Merin, because I
Speaker 3: think this government would be quite relaxed about introducing what
Speaker 3: they would call guardrails or controls or bumpers down the
Speaker 3: lane to help guide people in their retirement income strategy
Speaker 3: and avoid the risk of them all running out of money.
Speaker 3: And I think there was a legitimate public policy concerned
Speaker 3: that too many people will take too much money out,
Speaker 3: spend it all and then become a liability on the
Speaker 3: welfare state. And as you know, taxpayers, we might have
Speaker 3: feelings about that. So I think I think this government
Speaker 3: is looking in that direction and maybe reintroducing a degree
Speaker 3: of control around us. We haven't heard it yet, but
Speaker 3: I'm waiting for that. So about that could happen. But
Speaker 3: in the meantime, I think if they do introduce sort
Speaker 3: of guided default decumulation time strategies, they will always I
Speaker 3: think it's done with the intention of Look, when you
Speaker 3: knock on the door and say I need my money now,
Speaker 3: but I don't know what I'm doing, they will say, okay, well,
Speaker 3: let's walk you through a decision making process. Let's funnel
Speaker 3: you down to an outcome based on maybe a degree
Speaker 3: of questioning and a bit of interaction and a bit
Speaker 3: of people like you tend to do. This kind of
Speaker 3: process is rather than just put you know, one day
Speaker 3: a letter arrived saying, Hi, Mary, We've sorted your retirement
Speaker 3: income out for you, and here it.
Speaker 1: Is, and don't you worry about the charges. We've got
Speaker 1: that all under control thing. Okay. So a bit of
Speaker 1: just in time, education and a.
Speaker 3: Bit of nudge, you've got it.
Speaker 1: Yeah, okay, So what is our final advice to Mike?
Speaker 3: My final advice to Mike would be one talk to
Speaker 3: pension Wise. It's a free government service that's really helpful
Speaker 3: at walking people through the decision making process. It will
Speaker 3: empower you to have more informed conversations with your pension providers,
Speaker 3: and it is free. So so what's not to like
Speaker 3: about that other than you lose about forty five minutes
Speaker 3: of your life and it will probably be time well spent.
Speaker 3: So I'd encourage you to do that. Think about think
Speaker 3: about your standard of living. I think one of the
Speaker 3: biggest challenges people find as they approach retirement is knowing
Speaker 3: what income they need to live on and how to
Speaker 3: build in wriggle room around unexpected costs, and then think
Speaker 3: about how much certain income you want? You know, what's
Speaker 3: your what's your capacity for variability around all of that?
Speaker 3: And then from their start to think about, Okay, do
Speaker 3: I need some guaranteed income? Do I need an innuity?
Speaker 3: When does my state pension kick in? If I'm going
Speaker 3: to go into draw down? What's my tolerance for challenges?
Speaker 3: Who's offing good service? What are the investment choices? How
Speaker 3: active do I want to be with managing all of that?
Speaker 3: Take your time. This needs to run up at it.
Speaker 3: You can't all this in an afternoon.
Speaker 1: And that is why we get in the experts every
Speaker 1: now and then. Tom, thank you so much for joining us.
Speaker 3: My pleasure, Thank you, thanks.
Speaker 1: For listening to this week's Meren Talks Money. John, if
Speaker 1: you like to say thanks again, I talked over you.
Speaker 2: No, I cannot I do anything to the expert opinion there.
Speaker 2: I thought it was comprehensive and marvelous.
Speaker 1: Thanks for listening to this week's Meren Talks Money. If
Speaker 1: you like us, show Rage, review and subscribe wherever you
Speaker 1: listen to podcasts and keep sending questions or comments to
Speaker 1: Merriorn Money at Bloomberg dot nuts. You can also follow
Speaker 1: me and John on Twitter or X. I'm Maren, I'm
Speaker 1: as marins W and John is John Underscore STUFFECT. This
Speaker 1: episode was hosted by me Marren zum zep Web. It
Speaker 1: was produced by Summersidi, production support by Isabella Ward and
Speaker 1: sound designed by Blake Naples. A special thanks to Tom
Speaker 1: McPhail and of course John