Why your pension tax is collateral damage + Insuring your retirement
by Doug Brodie
Pensions are a compromise constructed between the tax man and actuaries.
If politics is your thing, you’ll know that Boris Johnson’s former Chancellor of the Exchequer and Education Minister, Liz Truss’s Minister for Equalities (!) and Rishi Sunak’s cabinet Minister without Portfolio, has been fired by his boss for breaching the ministerial code in regard to paying tax.
The relevant part is that he agreed he had paid a penalty to HMRC – if you google Finance Act 2007 schedule 24 up pops the Act of Parliament outlining – at the top of the page – when penalties are payable. It is clear and simple, one would be concerned if what you see there is confusing to either a government minister or his/her tax accountant.
The other Act that is similarly clear is Finance Act 2004, Part 4 – this deals with pensions. The Act itself is quite sparse, HMRC does all the in-filling with its manuals and practice notes which are voluminous and labyrinthine. It says that pension schemes are granted their tax status in order to provide benefits in retirement.
The reason for pointing this out is that we had an enquiry yesterday from a client who wanted to continue to make pension contributions past age 75, in order to pass on the money to children free of IHT. AJ Bell said no, so the suggestion was using a different provider. As it happens, I very much doubt any provider of note would permit such premiums as HMRC also sanctions providers: if you read the small print in pension t’s and c’s you’ll note that most providers include a line saying if they are sanctioned due to your contract then they can charge the fine back to your scheme. I’ve never seen it happen, but …..
HMRC has the power to apply blanket principles over the top of any individual practices, so they can always use the catch-all when needed. We did see one particularly perverse case from them:
according to the way regulations are written, it doesn’t actually stipulate that a premium needs to be paid in cash. This meant that ‘in specie’ payments could be made, such as transferring in BP or Vodafone shares - £100 share value equals £100 of premium on which tax relief would be granted.
this was fine until employees of a small, unlisted IFA firm transferred in their own shares of their own small business. At that point HMRC said ‘niet’. And quite rightly too, except …
HMRC had issued practice notes that outlined precisely how to do an in specie transfer, but because of this case they said that their practice notes were not verbatim and did not constitute what is legally permitted.
The case went to appeal and I don’t know what happened, but I can tell you that no provider will now entertain any in specie contributions, and that it is plain to see that tweaking the Tax Man’s tail is a) dangerous and b) likely to end up with your financial injury. We very much take the view that we will always stay well away from the edge of that envelope. We’ll continue to take ‘boringly predictable’ as a compliment.
Insuring your retirement?
If the intention is to live to 88 (as Aviva suggests) then your retirement depends on two things: your financial wellbeing, and your health.
Leaving aside the financial part, which is our main work, there’s not much point doing the heavy work in organising the longevity of your income if you are about to run headfirst into a health brick wall.
I’m inspired to write this as a wake-up call, chiefly for the male readers here. Prostate cancer will kill you if serious, it can be virtually irrelevant if found and treated early enough (as my oncologist assures me). I had a chat earlier this morning with a former City director who spent eleven years at F&C investment trust; a mutual contact was Simon Fraser, a former director of both F&C and Murray International. Simon died eighteen months ago at the age of 62, semi-retired, circa three months after a terminal diagnosis. He’s the third person I have know who has died within three months of diagnosis of a terminal disease.
Let’s not die too soon. I’m no hypochondriac, I’m from a medical family and a huge supporter of our NHS but you might consider a private review/health check/scan is worthwhile as a way of insuring against dying too soon – a private scan costs around £1,500 to £2,500 and hopefully is a complete waste of money.
Some of you may remember the name Jack Welch, the darling poster boy of management consultants and former CEO of General Electric. He once had a very serious heart attack. Later, well recovered and back to work, someone asked him what ran through his mind as he was being rushed to hospital, the supposed ‘life flashing before your eyes’. His reply was simply ‘Damn, I didn’t spend enough money’.
