I plan to become a POSER before the end of the current tax year. But that’s no-where near the state retirement age I hear you gasp in amazement; how will you do it?
Indeed, how can I become a POSER without claiming a state pension? Simply by saving today so I can live for tomorrow. Not easy when I’m throwing cash around at the timber merchants like knickers at a Tom Jones concert but there are plenty of ways to build a POSER foundation without locking my purse away deep in the vaults of Fort Knox.
If I could re-wind the clock to give my younger self some good advice it would be this – if your company doesn’t offer a defined benefit (final salary) pension scheme, don’t enrol in a pension but save that money in a cash ISA instead.
Outrageous advice! Fund Managers out there are no doubt sharpening knives, lighting torches and grabbing pitchforks from their garden sheds ready to roast me on a skewer like a juicy kofta kebab over a nice hot flame. Pension Advisers would deride such foolhardy notions, citing guff about tax relief given on pension contributions by the Government but to my mind they are only keen on seducing workers into defined contribution schemes because it keeps them in jobs and extends our taxpayer lifespans.
What is a decently funded retirement anyway? Well, that depends on your perspective and aspirations. A study done at Loughborough University claims that a single person will need at least £31,300 a year for a moderate income in retirement according to a pensions industry body (who?). The least you’ll need is £14,400 per annum on which to live and the most around £43,100. What I’d like to know is what are these figures based on?
The key omission of Loughborough’s interesting reportage failed to mention whether these figures were pre-tax or after tax because the key to a prosperous retirement is knowing all about TAX, what you’ll pay, when you’ll pay it and how to ensure you pay as little as is legally possible.
Let’s take the figure mentioned above of £31,300 a year and break it down further. For my example I’m going to assume that this is pre-tax income made up of the current annual state pension of £11,973 plus a private pension of £19,327. (You’d need a massive private pension pot to generate an annual income of £19,327 per annum).
You would pay zero tax on the whole of your state pension BUT because the combined income is greater than the current personal income tax allowance of £12,570 then you would be liable for tax on £18,730 which at the basic rate of 20% means you’d have to give the Revenue £3,746 leaving a net annual income of £27,554.
Whilst the remainder of your pension pot continues to stay invested then in addition to tax on your future annual drawdowns, you’d also be paying fund management charges that would be eating into your capital. Remember too that monies invested in a pension fund are subject to the vagaries of the stock market which may go up or down depending on which way the wind is blowing and that will in turn affect the total value of your pot. In bad or volatile markets, the value of your pot may plummet thus potentially affecting how much you have available to draw down from your pension in any given year.
Now in my crazy retro scenario, I’ve gone back in time like a pirate Time Lord raided all my private pension schemes and placed the money into a cash ISA instead. OK so I may not have benefitted from potential market rises or tax relief but my invested capital has remained secure, safely weathered every conceivable political/financial crisis and steadily grown in its very own tax-free wrapper.
Supposing that I’ve managed to grow my cash ISA pot to the same value as a defined contribution pension pot then let’s revisit the above example to see if I would be better off. State pension £11,973 tax free as under the tax threshold and £18,730 drawn from the ISA also tax free so £3,746 pounds plus fund management charges better off.
What’s more I can continue to save into a cash ISA without fear of breaching any pension lifetime allowances and landing myself with a huge tax headache.
The pensions industry will try to emotionally blackmail us with crap about inflation and how money in a cash ISA is worth less over time. However, £20 is still £20 regardless of whether you get it from an ISA account or a pension fund. When I studied economics back in the 80’s, inflation measured the buying power of money NOT the rate at which prices rise, this now seems to be the popular definition used in the media. Inflation erodes the buying power of everyone’s money anyway you get it.
Clearly the University’s estimated pension figures must be skewed in favour of yuppy pensioners benefitting from generous civil service gold plated pensions since most of us will have failed to earn an annual salary of £31,300 or £43,100 in our career lifetimes. My best wage only topped £32,000 and that was after about 30 years of employment.
The key to a prosperous retirement is to manage expectations and live within your means. Don’t be seduced by mass consumerism or pension preachers. Sounds boring but not impossible. Most single POSERs could still get a lot out of the minimal amount quoted of £14,400 if they re-examined their outgoings and gave up fags, booze, subscription services, takeaways, online gambling, tattoos and expensive holidays/smartphones.
Don’t believe the hype – you can retire on a lot less than £31,300 and still have a bloody good life. After all, I’ve lived on a part-time salary much smaller than the state pension for the past 5 years and still found the cash to pay for food, festivals and McFlurries.
