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