Weekend reading: The perversity of the Lifetime Allowance for pensions

Weekend reading: The perversity of the Lifetime Allowance for pensions post image

Good reads from around the Web.

Pensioners often seem as cosseted and fussed over by the government these days as pandas on the verge of getting it on in a panda sanctuary.

They’re a protected species, guarded by the pension triple-lock against the austerity that has hit other potentially vulnerable groups, and shielded from radical policies to, say, address the housing shortage that might turf sensitively coax 70-somethings and their cats from four-bedroom family homes that they can’t really afford.

That’s not to say many pensioners (perhaps including you 🙂 ) aren’t relatively poor despite a life of hard work, or that they haven’t done their bit, or that we should punish them for giving us Brexit.1

I just mean that when it comes to fueling the great engine of State – which most of us agree needs to be paid for – pensioners’ pennies have been kept away from the furnace. (Don’t get me started on the new Inheritance Tax rules that came in this week, although to be fair as I see it that as more of a perk for the beneficiaries).

We’ve even had the pension freedoms, which have given richer pensioners a sense of control akin to when they got their first Austin Allegros.

The 55% tax strikes back

Standing against this smorgasbord of delight for pensioners (and arguably would-be pensioners) is the ludicrous Lifetime Allowance, which former Pensions Minister Ros Altman lambasts in The Telegraph this week.

For those too young, impoverished, Ostrich-like, foreign, or accidentally reading this website to know, the Lifetime Allowance for pensions basically sees the Treasury taking your projected annual pension at the time you begin receiving it and multiplying it by 20. If the resultant sum is over the Lifetime Allowance – once £1.8 million, but reduced again this week to just £1 million today – you could see an effective tax charge as high as 55% on the excess. There are protections against this, but they’re a mind-bender.

Now, £1 million might seem a fortune to some of the frugalistas among you. But keep in mind it would currently buy an index-linked annuity paying merely £20,000 a year. It’s also easily breached by those on generous final salary schemes, such as those in the public sector.

Equally, the Lifetime Allowance is very hard to plan for if you’re younger and contributing to say a SIPP that’s invested in a bunch of index funds. If the market does well, you could end up being penalised for your years of extra cautious saving and diligent investing. Holidays you could have taken, restaurants you might have tried – all gone up in tax smoke.

The counterargument is that the State isn’t in the business of given people a richer retirement. That may be true, but surely Lifetime Contribution allowance – akin to the ISA allowances, and adjusted to take into account defined benefit schemes in the public sector – would be a fairer and less random system?

Because as things stand, as Altman points out, people are retiring early merely to avoid it – including some super-valuable workers that we might prefer to see carrying on into their 70s.

Altman writes:

If you are on course for a £50,000-a-year pension by the time you’re 60, you will know in advance that you will come in over the limit.

In these circumstances, it makes sense to retire before you reach that point, which you can do at any age from 55, and take a reduced pension (the earlier you retire, the lower the pension).

This lets you avoid hitting the Lifetime Allowance, because the new rules don’t take into account that this lower pension would be paid for more years. They ignore the fact that you would probably receive the same amount – or even more – over your lifetime. By taking the lower pension, you can avoid the draconian pension tax, and still get the same expected pension payments in the end.

This encourages GPs and senior workers to retire much younger than they otherwise might.

This was a new perspective for me. Indeed Altman makes a pretty convincing case that the Lifetime Allowance is doing few favours for anyone, including society at large.

Worth a read.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

  • Young ‘savvy’ men trade the most, and see lower returns [Research]Science Direct
  • What we said when the world changed forever [PDF]Morgan Housel
  • 10-year index linked gilt yields at all-time low [Graph]Bond Vigilantes/Twitter
  • The difference between price and value – Todd Wenning
  • Global stock market valuation ratios [Interactive map]Star Capital
  • Active outperforming legend Joel Greenblatt does a talk for Google [Video]YouTube
  • The key to gauging the value of everything – The Value Perspective
  • Charlie Munger on handling mistakes – Novel Investor
  • Thinking about risk when you’re a seed investor – Medium

Other articles

  • The best hot spots for London commuters [Interactive tool]Totally Money
  • What I’ve learned about life – What I Learned On Wall Street
  • The point of money is to magnify you – Jane Hwangbo
  • Age makes you happier. And poorer – The Psy-Fi blog
  • The basics of basic (aka universal) income – John Kay
  • Kurzweil claims the singularity will happen by 2045 – Futurism
  • 23 things AIs can do better/faster/cheaper than you can – Seth Godin
  • Is [X] really the “new Internet”? – Stefano Bernadi
  • Diversification, adaptation, and stock market valuation [Long, says higher valuations might be justified in the era of easy passive investing]Philosophical Economics

Product of the week: The Lifetime ISA has made it to launch – much to the surprise of many who have pondered the thing. That’s not to say it has no attractive features for young savers. It’s more that it’s a complicated product that may well confound them. Get up to speed with ThisIsMoney and a Q&A from the FT [Search result]. I’m hoping to chip in (/away) on Tuesday, too.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.3

Passive investing

  • Swedroe: Benefits of alternative lending [Peer-to-peer etc. US but relevant]ETF.com
  • Even the best stock pickers can’t beat the Smart Beta bots – Bloomberg

Active investing

  • Tesla’s story is even more attractive to investors than its cars – New York Times
  • Trading places: How DIY hedge funds became a thing – Wired
  • Larry Fink walks back talk of Blackrock’s shift to robot investing – CNBC

A word from a broker

  • The Lifetime ISA: A £1,000 a year gift from the government – Hargreaves Lansdown
  • The case for investing in UK small caps right now – TD Direct

Other stuff worth reading

  • How to identify bubbles [Podcast]Bloomberg
  • London faces a glut of new luxury homes [Search result]FT
  • New buy-to-let tax: How it works and how to beat it – Telegraph
  • How can I stop my boyfriend hoarding his lose change? – Guardian
  • £849k now, or £24k for life? Cashing in a gold-plated pension – ThisIsMoney
  • Deprived of the £155 state pension because of ‘contracting out’ – ThisIsMoney
  • Ritholz: Your brain wasn’t built to handle reality – Bloomberg
  • Brexiteer philosopher kings latest: War talk, the death penalty, political disintegration
  • Mark Carney urges The City to plan for no Brexit trade deal – BBC
  • Automation makes things cheaper so why does it hurt? – Harvard Business Review
  • The ungrateful refugee – Guardian

Book of the week: The low volatility or ‘low vol’ factor has been pretty popular in recent years, which made it expensive last time I looked. However this too will pass. To learn the underpinnings of the low volatility anomaly, try High Returns from Low Risk. Written by one of the pioneers of low volatility, it explains how lower risk stocks have contrarily beaten the riskiest ones by a claimed 18 times over the past 80 years. You’ll thus be ready to swoop for low vol when it comes off the boil! Although I guess by definition there won’t be any rush…

Like these links? Subscribe to get them every week!

  1. I fully know not all old people voted for Brexit by any means, and saw and met many wonderful and wrinkly Remainers on the march the other week. Just as not all Leavers are xenophobes. Etc etc.
  2. Remember you need to be FSCS protected with these so-called bonds for their safety to compare with UK government bonds.
  3. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator http://monevator.com/weekend-reading-the-perversity-of-the-lifetime-allowance-for-pensions/

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