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We Speak to the Pensions Expert Who is Taking His Tax-Free Cash Now · Merryn Talks Money

• 0:16
  Speaker 1: Welcome to Merton Talk Sure Money, the personal finance edition
• 0:19
  Speaker 1: of Merton Talk's Money and these bonus podcasts we talk
• 0:22
  Speaker 1: about the best strategies for making the most of your money.
• 0:25
  Speaker 1: I'm join Stepic, senior reporter for Bloomberg and author of
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  Speaker 1: the award winning, in fact, multi award winning Money Distilled newsletter.
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  Speaker 1: Now Mern's out this week and instead I'm going to
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  Speaker 1: be joined by pensions expert Tom McPhail, friend of the show.
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  Speaker 1: Tom spent almost twenty years at Hargreaves Lansdown, fifteen of
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  Speaker 1: those is their head of retirement Policy. He's also a
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  Speaker 1: trustee director of a very large final salary dB pension scheme,
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  Speaker 1: which I just said I thought would be absolutely fascinating
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  Speaker 1: and then caught myself and thought, my goodness, I used
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  Speaker 1: to be cool. But anyway, enough of that, and is
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  Speaker 1: a freelance media contributor to discussing all things pensions. Thanks
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  Speaker 1: very much for joining me today, Tom, Thank you John. Obviously,
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  Speaker 1: one of the reasons we've got you on the show
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  Speaker 1: today is because there's a little thing, the November budget
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  Speaker 1: coming up in two months time, and there's going to
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  Speaker 1: be an awful lot of speculation between now and then.
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  Speaker 1: But one particularly interesting thing we've talked a lot about
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  Speaker 1: is the potential impact on pensions, and obviously a lot
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  Speaker 1: of people have been scrambling to try and get ahead
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  Speaker 1: of potential changes. Now, nothing we say on this show
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  Speaker 1: is personal financial advice, just to be very very clear,
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  Speaker 1: and you always have to think about your own circumstances.
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  Speaker 1: But my was caught the other day by an article
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  Speaker 1: you wrote in which you said you are going to
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  Speaker 1: take your twenty five percent tax free lumps some out
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  Speaker 1: of your pension ahead of the budget. And I thought
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  Speaker 1: it was quite an interesting rationale. So should we have
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  Speaker 1: a wee chat about that and you can explain to
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  Speaker 1: the readers or listeners rather what it was that drove
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  Speaker 1: this decision and how you thought about it.
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  Speaker 2: Sure, absolutely, and through that process hopefully we can emphasize it.
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  Speaker 2: Just because I've done it, it doesn't mean everybody should.
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  Speaker 2: Might say, exit this up quite quite particular. You guys
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  Speaker 2: have talked already about the political context, but I think
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  Speaker 2: it's worth just briefly revisiting that. Yeah, for the last
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  Speaker 2: twenty twenty five years, certainly post two thousand and eight,
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  Speaker 2: pretty much every budget there's been that. Oh, I wonder
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  Speaker 2: what rules are going to change. I wonder what allowances
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  Speaker 2: are going to take away. I wonder what restrictions are
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  Speaker 2: going to impose. And particularly once we got into the
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  Speaker 2: coalition years, there was a series of budgets where they
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  Speaker 2: hipped away at the pension allowances. So you know there
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  Speaker 2: is some form here, and we didn't always know in
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  Speaker 2: advance what it was going to be. But I think
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  Speaker 2: the particular situation we're in now after Rachel Reeves's budget
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  Speaker 2: last year, a very substantial increase in borrowing, only running
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  Speaker 2: a deficity around five percent, there's debt to GDP is
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  Speaker 2: currently at around one hundred percent, so there's a real
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  Speaker 2: squeeze on the government. So I think that context is relevant.
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  Speaker 2: I think it's also relevant to point out that Tossed
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  Speaker 2: and Bell, who I've met a couple of times and
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  Speaker 2: no reasonably well and I've read his book, which, by
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  Speaker 2: the way, I would recommend it's a really interesting and
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  Speaker 2: well read book. With disagreed with almost everything in it,
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  Speaker 2: but it was. It's genuinely a well written and interesting book.
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  Speaker 2: But yet he is clearly not averse to the idea
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  Speaker 2: of taxing wealth. The government has found to a wealth
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  Speaker 2: tax as such, but where is the wealth. It is
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  Speaker 2: in the pension system. And he has talked in his
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  Speaker 2: resolution found eight days about capping the tax freedom summ
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  Speaker 2: at forty thousand pounds, which is a really swinging cut.
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  Speaker 2: The ifs talked about cutting it to one hundred thousand pounds.
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  Speaker 2: It's not even as if the government's the only one's
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  Speaker 2: thinking in these kind of terms. So I think that
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  Speaker 2: context is relevant. If ever there was a moment when
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  Speaker 2: a government was going to come along and strict the
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  Speaker 2: pensions tax free cash. Certainly now more than any time
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  Speaker 2: I've been working in pensions, it feels like the moment
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  Speaker 2: that context really made me feel deeply uncomfortable. And then
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  Speaker 2: there's my particular personal circumstances. John, I'm fifty nine, I'm
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  Speaker 2: only working part time now, so I'm going to tap
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  Speaker 2: into my pensions pretty soon anyway. And I think a
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  Speaker 2: really crucial point here is because I've been pretty lucky
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  Speaker 2: in life, I cannot accrue any more tax free cash.
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  Speaker 2: So however much more my pension pot rows, the amount
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  Speaker 2: of tax free cash I get out of it is
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  Speaker 2: always going to stay the same. They've frozen. That's the limit.
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  Speaker 2: All the growth of my pension pot in the future
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  Speaker 2: is going to be taxable when I draw the money out.
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  Speaker 2: And then in addition, they've just announced they're going to
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  Speaker 2: take away the inheritance tax exemption on pension pots from
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  Speaker 2: twenty twenty seven. You know, I'm only fifty nine now.
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  Speaker 2: If I live until I'm oneventy five, then even if
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  Speaker 2: I you know, the money suffers further taxation when it
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  Speaker 2: gets passed on to any beneficiary, so you know, the
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  Speaker 2: tax context has already changed. That then led me to
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  Speaker 2: the realization that, well, look, if it's a trade off
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  Speaker 2: between leaving the money and the pension pot and potentially
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  Speaker 2: suffering tens of thousands of pounds of extra tax if
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  Speaker 2: they reduce the allowance or taking an out of the
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  Speaker 2: pension pot now reinvesting it over the next few years
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  Speaker 2: in ices between myself and my wife where it will
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  Speaker 2: then continue to grow tax free, and from where we
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  Speaker 2: can draw in it tax free. Actually pretty quickly, I'm
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  Speaker 2: going to be ahead of the game. I use an IFA,
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  Speaker 2: by the way, and I would encourage others to do
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  Speaker 2: the same. So, you know, he and I sat down
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  Speaker 2: and talked it through together, and he ran a spreadsheet
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  Speaker 2: for me and the numbers were pretty clear that within
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  Speaker 2: a few years I would be better off for taking
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  Speaker 2: the tax free cash out now and putting it into
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  Speaker 2: my eyes. So, because I'm only working part time now,
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  Speaker 2: I'm no longer generating the kind of surplus income that
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  Speaker 2: would allow me and my wife to keep filling up
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  Speaker 2: our eyes for allowances. For those allowances go begging. But
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  Speaker 2: if I take the money on my pension, I can
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  Speaker 2: then use up those allowances. So there's a whole lot
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  Speaker 2: of factors there that really came together to make this
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  Speaker 2: a pretty simple decision for me.
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  Speaker 1: I think that point about the reduction, So at the moment,
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  Speaker 1: the tax free allowance is just over two hundred and
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  Speaker 1: sixty eight thousand pounds, So if they were to reduce
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  Speaker 1: that even to the one hundred thousand, let alone the
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  Speaker 1: forty k that Torson had previously suggested, then I mean
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  Speaker 1: that is a massive, massive loss there. So I think
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  Speaker 1: your point about sitting down with someone and going through
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  Speaker 1: a spreadsheet and working out where your break even point,
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  Speaker 1: if you like, or your pain point is makes a
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  Speaker 1: lot of sense, because obviously the flip side of this
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  Speaker 1: is the fact that if you do take it out
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  Speaker 1: and she doesn't change it. Then that means you are
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  Speaker 1: going to have this problem of well, okay, what do
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  Speaker 1: I do with the money just now? Because obviously the
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  Speaker 1: annualizer allowance is twenty thousand pounds, so even between two
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  Speaker 1: people that's they'll it's still only forty thousand, which means
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  Speaker 1: it still takes quite a while to get that money reinvested,
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  Speaker 1: and in the meantime you are going to be liable
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  Speaker 1: for tax or in any kind of growth and that money.
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  Speaker 1: So I think that's that's the key. Don't say to
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  Speaker 1: think of it, isn't it on the other's say to
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  Speaker 1: this calculation.
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  Speaker 2: John, it could be worse than that, because I mean,
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  Speaker 2: the worst case scenario is I take this money out
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  Speaker 2: of my pension, which I am doing, and then they
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  Speaker 2: wrong foot me by saying, no, we're not going to
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  Speaker 2: reduce pension tax rece just cap off the amount you
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  Speaker 2: can put in your ices, and that would be That
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  Speaker 2: would be disappointing because then I'd have this big bag
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  Speaker 2: of money in my bank account and I'd have no
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  Speaker 2: tax free shelter to put it into. I don't think
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  Speaker 2: they're going to reduce either of the annual allowance or
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  Speaker 2: torst the bell again. Has talked in the past about
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  Speaker 2: I think he suggested one hundred thousand capping off the
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  Speaker 2: maximum amount. So I don't think they're going to do that,
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  Speaker 2: But you know, I'm not ignorant of the risks I'm
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  Speaker 2: taking and making this decision. It could go really badly
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  Speaker 2: for me. And if it does, you can all get
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  Speaker 2: on X and send me tweets telling me.
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  Speaker 1: Let's hold that, let's hold our listeners. Don't do that.
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  Speaker 1: But yeah, I think it's just really important to understand
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  Speaker 1: that this is very clear that this does suit you,
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  Speaker 1: and you've read weighed up the risks and rewards. But again,
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  Speaker 1: it's suitable for yourself, not necessarily for everyone else needs
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  Speaker 1: to think through their own their own circumstances. But I
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  Speaker 1: think the way you've described that in the thought process
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  Speaker 1: behind it makes a lot of sense in terms of
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  Speaker 1: if you're you know, a mere strip of a lad
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  Speaker 1: like me and actually not at the point where you
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  Speaker 1: could take your lump sum even if you wanted to,
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  Speaker 1: What what should people like me be thinking about before
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  Speaker 1: the budget rolls around, Because I don't know about you
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  Speaker 1: be for to my mind, this is one of the
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  Speaker 1: least I mean, obviously before every boy there's always an
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  Speaker 1: element of uncertainty, but there's tame. Just as with the
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  Speaker 1: last time, it sort of feels as if almost anything
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  Speaker 1: could happen, and that isn't really much. This kind of
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  Speaker 1: off completely off limits. So in terms of is there
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  Speaker 1: anything at all that you can do as a I
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  Speaker 1: couldn't saver or or I couldn't pensionality, I don't know
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  Speaker 1: anentually your your money against what may happen in November
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  Speaker 1: twenty sixth.
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  Speaker 2: Really good question, John, And there are limited options available
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  Speaker 2: to us. And my worry is that I've talked about
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  Speaker 2: the pension tax free lumps on the pension commencement lumps.
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  Speaker 2: Some there are other tax breaks available to pension savers
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  Speaker 2: which could come under pressure government. Actually for the government
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  Speaker 2: grants on pensions every year is an order of seventy
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  Speaker 2: billion pounds. So the most obvious thing is the pension
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  Speaker 2: contribution tax relief that you get for putting money into
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  Speaker 2: a pension. And there's the National Insurance contribution relief. You know,
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  Speaker 2: employers put money into pensions, no national assurance liability on that.
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  Speaker 2: The money's growing tax free in the pension pots. So
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  Speaker 2: if you've got certain cash that you are thinking of
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  Speaker 2: putting aside for retirement. It's a no brainer to do
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  Speaker 2: it ahead of the budget rather than after and.
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  Speaker 1: Just moving on he can other options. Is what else
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  Speaker 1: do you think we should be watching out for. I mean,
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  Speaker 1: obviously they've they've changed the inheritance tax situation on pension
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  Speaker 1: zone or in stocks.
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  Speaker 2: And the farms.
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  Speaker 1: That's another idea that people get very concerned about. Do
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  Speaker 1: you think they'll make any further moves on front?
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  Speaker 2: Oh? John, So, I was talking to some farmers yesterday
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  Speaker 2: down at a sheep auction, as you do in my
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  Speaker 2: part of the world, I too, am living the dream
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  Speaker 2: and they are incandescent with rage about the ID changes.
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  Speaker 2: I don't think. I don't think down in Westminster they
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  Speaker 2: quite realize just maybe they do when they don't care.
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  Speaker 2: But the entire farming community is absolutely up in arms
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  Speaker 2: about what they've done on the inheritance tax. I don't
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  Speaker 2: see any sign of the government softening their position on that.
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  Speaker 2: I think I think that one is a done deal. Also,
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  Speaker 2: you know, you look at the private school VAT change
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  Speaker 2: which was which was introduced mid year. So I think
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  Speaker 2: where the government feels it is ideologically appropriate to do so,
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  Speaker 2: they're they're not shy of imposing taxes. They're bending over
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  Speaker 2: backwards to try and preserve their manifesto promise of not
• 11:38
  Speaker 2: raising income tax VAT and national insurance. So we can
• 11:41
  Speaker 2: argue about whether they honored that promise on the employers NI,
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  Speaker 2: but it's about protecting workers and where does that leave them.
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  Speaker 2: It's about taxing wealth.
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  Speaker 1: I think everyone would agree there are sensible things that
• 11:53
  Speaker 1: could be done with particularly council tax reform or the
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  Speaker 1: we that we tax generally. And I think the only
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  Speaker 1: thing that the thing I'm more concerned about is that
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  Speaker 1: a lot of the measures are just slapping extra complexities
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  Speaker 1: on rather than trying to step back and do our
• 12:13
  Speaker 1: full scale reform, which I suspect which just require more
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  Speaker 1: time than the government viels it has for some reason,
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  Speaker 1: and so much.
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  Speaker 2: Of tax and regulatory reform in this country it's just additive,
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  Speaker 2: you know. It's not reforming another layer of regulation or
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  Speaker 2: another layer of tax onto an existing and already fiendishly
• 12:35
  Speaker 2: complicated system. And again I would speak up in Torst
• 12:39
  Speaker 2: and Bells Defect. He argued in his book for Fundamental
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  Speaker 2: Reform with the UK's tax code that it has become
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  Speaker 2: hugely byzantine and bureaucratic and inefficient and incoherent.
• 12:53
  Speaker 1: This is a slightly not off topic question, but slightly
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  Speaker 1: bigger cubation and micro question. Do you think that the
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  Speaker 1: government is a little bit who worried about the reaction
• 13:02
  Speaker 1: to the bond market in that context, because I sometimes
• 13:06
  Speaker 1: think that if, if you, if you could stand up
• 13:10
  Speaker 1: there and tell a decent story about how they were
• 13:14
  Speaker 1: going to take six months a year to do a
• 13:17
  Speaker 1: big review of this particular area of tax or this
• 13:20
  Speaker 1: area of spending more importantly, for example, on the you know,
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  Speaker 1: the disability but an if it's side of things, I say,
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  Speaker 1: we're not cutting in just now, but what we are
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  Speaker 1: going to do is we're going to go through this
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  Speaker 1: with a fine tooth comb. We're going to figure out
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  Speaker 1: where it's going wrong, and at the end of that process,
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  Speaker 1: at next year's budget, we're going to present a plan
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  Speaker 1: for cutting back to a reasonable level or something like that,
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  Speaker 1: something that doesn't necessarily get ticked off by the OBR,
• 13:48
  Speaker 1: but that expresses a kind of direction of travel that
• 13:52
  Speaker 1: the bond market would have sympathy with. You know, we
• 13:55
  Speaker 1: are going to get this in hand kind of thing.
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  Speaker 2: That's a really interesting question because bond investors. What they
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  Speaker 2: care about is the stability of the government, economic growth, inflation.
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  Speaker 2: You know, if the government presents a credible plan for
• 14:11
  Speaker 2: how it can push all those numbers in the right direction,
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  Speaker 2: I think, you know, investors buying government debts would be
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  Speaker 2: open to that, and they would listen to that, but
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  Speaker 2: it's got to be credible. And one of the government
• 14:26
  Speaker 2: bummed up against already was where they tried to introduce
• 14:29
  Speaker 2: some spending cards and they couldn't get it part of
• 14:32
  Speaker 2: their own party. The two huge areas aside from debt,
• 14:36
  Speaker 2: the two huge areas of government spending are welfare and
• 14:40
  Speaker 2: health the NHS. You know, unless they can show some
• 14:43
  Speaker 2: credible plans on how they can bring those government expenditure
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  Speaker 2: under control, I think they're always going to be fighting
• 14:49
  Speaker 2: an uphill battle.
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  Speaker 1: Yes, I mean, it's just it's this. This is the
• 14:54
  Speaker 1: point where I have sympathy for the people who are
• 14:56
  Speaker 1: who want to get ready the or br A law.
• 14:58
  Speaker 1: I realize an awful lot of people who weren't that,
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  Speaker 1: But actually, you know, they're doing it for reasons that
• 15:04
  Speaker 1: are different to me. The sense that if they didn't,
• 15:07
  Speaker 1: if someone thinking that will what they would get away
• 15:09
  Speaker 1: with everything, but we're going to need it up up shortly.
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  Speaker 1: But one thing I did want to not let you
• 15:16
  Speaker 1: leave without Hans and Tom was, let's say we me
• 15:19
  Speaker 1: dree chancellor for the day. If you had one thing
• 15:22
  Speaker 1: on your wish list that you could just im pause
• 15:26
  Speaker 1: or you know, push through, what would it be?
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  Speaker 2: Yeah, off the cuff, right, So I think spending reform
• 15:39
  Speaker 2: is I would actually look to reduce the size of
• 15:42
  Speaker 2: the state as much as I could. I touched there
• 15:44
  Speaker 2: on the welfare bill. It's ludicrously out of the role, right,
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  Speaker 2: So we count with this country's finances back on a
• 15:52
  Speaker 2: sound footing without bringing spending under control. So I would
• 15:55
  Speaker 2: definitely put that very high on my shopping list.
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  Speaker 1: Tell us to tell them that's on your wish life,
• 16:00
  Speaker 1: where as you should actually just kind of be the
• 16:01
  Speaker 1: sort of thing you think a chancellor would immediately be
• 16:04
  Speaker 1: thinking about as soon as they stand up.
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  Speaker 2: But we are, we are, we are well.
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  Speaker 1: Look, thanks very much, Tom, all right, thanks John, thanks
• 16:20
  Speaker 1: for listening to this week's Merton Talks to Your Money.
• 16:22
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  Speaker 1: are you Tom? People can follow you.
• 16:37
  Speaker 2: I'm at Pensions Monkey.
• 16:40
  Speaker 1: There we go, and this episode was produced by some
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