Deleting a £60,436.22p tax bill, is a tracker worth it, and Hargreaves’ plane
by Doug Brodie
Agnostic: it is what it is
Being independent, we are agnostic in our choice of assets, products, managers, platforms and strategies – we have the luxury of being able to do whatever we want in creating client portfolios. We live and die by the sword though – if the income a client needs isn’t delivered then the relationship is very short lived, so our job is finding the optimal solution to meet your specific needs.
Looking at our database, we currently have money managed by forty-seven different managers on eleven different platforms. In framing our research, a core foundation of strategy is to compare the cheapest available tracker, the broadest global index, a traditional 60/40 (equity/bond) wealth manager solution, an RPI linked annuity, and natural income (dividend income from trusts).
We then crunch the numbers based on a £100k investment with three possible types of income withdrawal: 1) 4% of the fund, 2) a flat £4,000 every year and 3) £4,000 in year one increasing by RPI every year. Lastly we add a fixed portfolio of trusts, simply totalling the cumulative income. We run this over twenty-two years and add up the total income and then also the final capital value.
These are the results from 1999 to 2021:
When the facts change our recommendations will change, but for now we’re pretty content to stick with this outperformance.
Pensions are a veritable onion amongst retail financial arrangements. Every time a government wants to amend the tax treatment or terms they do so by adding a further layer to the already complex arrangements.
You may remember back in pandemic days that there was a kerfuffle within the medical profession that doctors were effectively working pro bono in doing the longer hours we needed. This is because they are in the NHS final salary scheme, and pensions have a limit on the annual contributions that can be made. If the annual payment is too high, the person gets a tax charge for that year; as doctors worked overtime, their salary went up, so the payments to their final salary scheme went up resulting (in some cases) in the pension premiums increasing and creating tax bills that were higher than the overtime pay. Damn.
Within a final salary scheme the member can’t drop in and out and has no control whatsoever over the deemed premiums being foisted on their employer (actually a future liability of income). As a salary goes up, that has a material impact on the funding needed for the pension because every 1/60th of the pension is using the final salary, not earlier earnings.
This hits teachers too – the Teachers’ Pension Scheme is pretty much as gold plated as any you can find. We look after a chain of academies, providing pension advice to all who want it, and chiefly to the heads and deputy heads. As this profession has developed, academies and other start-up schools have sought the best teaching staff. As school funding has been cut, school boards have sought to hire the most competent, and to ensure they keep the best.
This has pushed up the annual income for many great teachers and often those with 20+ years of experience. This is a rough example, so you get the idea:
Jo has 25 years’ experience and is on £60k per year, so her accrued final salary pension was currently 25/60ths x £60k = £25k per annum, index linked.
Jo now gets headhunted to a new school, with a salary jumped up to £85k per year, which means her new accrued pension is 25/60ths x £85k = £35k.
In that one single year, the effective premium into her pension is the amount to buy an extra £10,000 per year, index linked for life.
It happens frequently. Sally came to us because she had always been PAYE as a teacher, and recently had been receiving material pay rises from her academy employers. She hadn’t noticed at first, then after three years she suddenly became very aware.
Sally has a young family and does not have spare cash. She had no idea of her tax position but had colleagues who had received material tax bills. We ran the numbers: over the past three years the cumulative tax she owed was now £60,436.22. Normally you can get the pension scheme to pay the tax but there are time limits and limits to how much they will pay. There are mandatory sums that pension trustees have to pay, and they can also assume tax liabilities on a voluntary basis.
Sally was too late, she had missed the deadlines, and she was also in trouble for not recording the sums on her self-assessment (she is PAYE, doesn’t know a thing about it). To cut this story short, it took twenty-one months, two accountants and the laying out of the request in a non-contentious manner to the trustees, and at the end of January they agreed to pay her tax bill from the pension. Her £60,436.22 debt disappeared. Happy January Sally!
This is the difference between an advisory firm and an execution-only fund supermarket like Hargreaves Lansdown – ours is a service, not a product. Hargreaves Lansdown has just posted its latest results this week and the noticeable item for us is that it received £121 million in interest. Now HL isn’t a bank – that interest is money that it skims for your SIPP or ISA bank account interest, and it doesn’t quantify that to anyone. It’s a charge on its clients, it comes directly from client bank accounts and every year we write to the FCA about this invidious practice. If you have an HL account, ask for your money back.
Both Peter Hargreaves and Steven Lansdown are billionaires through the charges paid by their customers. The £121million in interest could have bought Mr Hargreaves’ Embraer plus four others in different colours. As the Mail reports …
