Pension, Badgers, Nutmeg and Covid

I headed to Liverpool this week to speak about the Gender Pensions Gap at the Labour Party Conference. Thanks to Vanguard for hosting and tabling this topic.

What an eye-opener! Protestors were out in force, from Gaza to school meals, climate to badgers, Reform to Brexit. Opinions, perspectives, campaigns everywhere. There was probably a Crochet Liberation Front somewhere, staffed by nice ladies in tie-dye.

The word on the money street is Growth. Growth, Growth, Growth. But of course, the subtext here is how? And Growth’s less upbeat cousin is currently called Tax. Tax, Tax, Tax. Heading soon to a cinema near us all.

The rumour mill is in overdrive about possible Budget changes to tax-free cash from pensions. I spoke to Tom McPhail (former Head of Retirement Policy at Hargreaves Lansdown) this morning, after he wrote a piece in the Times yesterday explaining why he was finally acting on fears and rumours and taking out his tax-free cash before the Budget. I was interested because this is breaking all the unwritten rules of writing about money. We don’t act on rumours. But Tom knows his stuff. So why now?

His decision was primarily driven by reading the political tea leaves. He’s also clear that he’s not a financial adviser and so it’s a personal view only. And a view which involves guesses. But we’ve been given a few clues.

Pensions in the firing line

Tom points to Torsten Bell’s well-known political views on wealth and pensions. Torsten is the Pensions Minister and I heard him speak this week. He’s super ambitious, very engaging, got a Tintin-esque charm and yup, wants to tax wealth as much as he probably wants to be your next Chancellor. (I’ve never spoken to him so intuition not fact!)

Let’s recap the current rules on pensions

We can currently take 25% of our pensions and pay no tax. Up to a maximum tax-free amount of £268,275. In other words, this 25% allowance applies to everyone with a pension of less than about £1.07 million. Every pound above this amount will be taxed as income when you take it out. Which impacts senior people in the public sector (e.g., doctors, long-standing politicians) and well-paid, typically older folk in the private sector.

Let’s say that Labour do cut the tax-free cash limit. £100,000 is a maximum number which has been suggested by a leading economic think-tank. This would mean that anyone with a pension of more than £400,000 would have to pay tax on more than they bargained for. They could take out £100,000 and pay no tax, but every pound after that would incur income tax at their current rate.

This feels like the lowest politically acceptable level, because below that you start hurting public sector nurses, teachers and soldiers which they won’t want to do.

It’s still a big jump. A higher level of £150,000 might be more acceptable and will then only impact those with pensions of £600,000 and above. (Just fyi, Torsten Bell is on the record as suggesting this tax-free cash should be cut to £40,000 so this is not La-La Land folks).

Back to Tom. He’s 59. He spent decades working in pensions so built up a healthy one. He’s working part-time now and dipping into his pension for income. His guess is that Labour could well reduce tax-free cash in this Budget (which he stresses to me is just a guess). So he is planning to take his remaining tax-free cash now, with the assumption he can recycle £20,000 a year from this lump sum into an ISA for himself and again for his wife, and in 3-4 years get this money back into what will be an entirely tax-free environment. The trade-off is that he will pay more tax this year.

This is arguably an easier decision to make for those with more than £1.1 million saved into a pension, for whom the risks of acting now are less. For those with less than around £600,000, I’d say there is no compelling reason to do anything. I’d expect you to be fine.

For those with about £600,000 - £1 million in a pension, I think it’s a lot harder. My instinct here is that the risks of second-guessing politicians outweigh the potential benefits but it’s ultimately our individual choice to make. Readers should be aware that once you take the tax-free cash, you can’t reverse this move and the tax consequences will stand even if you return the payment and claim 30-day cancellation rights.

Pensions are so complex it is an area where I think getting some financial advice for your individual circumstances is a sensible move.

How might it work?

So say they do make a change? When might it kick in? The tax-free cash bit is set in legislation but the Government can change the specific maximum amount overnight. They could say in the Budget that it changed at midnight that morning. So it’s a done deal. The industry would squeal and protest and say they needed time to update systems etc, but it could be done in theory. Once again, we just don’t know.

Wall Street ditches the spice

In other news, this week Nutmeg announced that it is being rebranded to parent brand JP Morgan Personal Investing from November, with a fuller investment platform offering loads more choice being rolled out next year. If you’re a customer, I don’t see any need to do anything or panic. It will start to look and feel a bit more corporate but nothing much will change in the short-term. From next year, it will probably just get a bit better. So I’d wait and see with some optimism.

Over and out from me for this week. Have been feeling rubbish all week and I tested positive for Covid this morning. I met and had a very nice chat with Martin Lewis at a conference this week. I hope I haven’t given the nation’s most trusted man Covid 🤦‍♀️ …I shall blame that bloody badger!

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