The £10 pension

The £10 note has got to be my favourite Dave Allen sketch and makes an ideal metaphor for a sustainable pension system.

Just in case you can’t watch it now, the chap walks along and notices a £10 note sitting under the wheel of a VW Beetle. Losing patience, he crosses the road to a cafe where he drinks tea and nervously awaits the car’s owner. The tension builds as more and more tea is delivered, the other diners oblivious to his dilemma. Of course the car’s owner eventually arrives and in noticing, he rises from the table only to watch as everyone else scuffles out, having been (now) obviously awaiting the same person.

He thought the £10 was coming all to him and through all the build up his disappointment is priceless. I see taxes on pension income the same way. It would be nice to know when that time comes, I can calculate my pot’s worth without a subscription to Voyant or Truth, or an adviser full-stop. Under the current system, I’ve often wondered if the 25% tax free cash only serves to encourage taking money out from pensions, rather than leave it alone if not needed.

Hmm, just like an ISA, I suppose.

Ever notice how people are quite protective of their ISAs? They know the money is there and it’s working away. Should they really need it, 100% is available without complicated decisions. With pensions, the approach is influenced by lack of trust and hindered by big decisions. We want to take out the tax free cash before THEY take it away. ISAs don’t have the same PR problem. Ultimately, pension tax free cash ends up in the bank earning 0.5% or being spent in a rush.

How you spend your net salary is your call, though maybe the 25% tax free ‘incentive’ could work better upfront? You gain some incentive to lock away your money, but instead of the 20% marginal rate, you pay a 15% concessional tax via the pension. Instead of 40% you pay 30% upfront via the pension plus a tax code. The rest belongs to your ‘future self’. This matches consumption deferral with a reward, but avoids the huge loss in tax revenue; especially if we ‘re all prudent with Auto-Enrolment. What a conflict in policies!

Changing the system will always put someone out and a long term transition might be the fairest way to spread the impact. A shandy if you will. Australia changed the nature of its pension taxes in 1983 to a TTE system compared to the usual EET. It can be done and the sky won’t come down. Maybe the industry had trouble coping with the change before computers, I don’t know, but in my time when you met someone with pre-1983 earnings, you had a spreadsheet to quickly calculate the proportion. It wasn’t hard.

Started work in 1973 and contributed into the same pension until you retired in 1992? That meant 50% taxed (pre 1982) and 50% (post 1983) untaxed on withdrawal.

Those with pre-1983 pensions came to be less common with every year and these days, pretty much a limited number have it. Mind you, you’d never mix ‘pre’ and ‘post’ pension money unless it could work in the client’s interest. Yep, sometimes you needed advice, but it was more simple to avoid mixing just as you would with today’s GARs.

Although ISAs have had many names and refinements, finally they are simple, yet they could be more inclusive as a workplace pension. A ‘Pension ISA’ through Automatic Enrolment could enhance saving, lessen the ‘tax free cash’ effect on approaching retirement and balance the ledger between generations. It even might allow us to move away from the complex Lifetime Allowance. Well, I can dream, can’t I?

We shall see.