The subtle art of not giving a... Pension.
I’m going to share a very delicate conversation I had with a lovely client of ours on the subject of Pensions.
“Pensions are difficult to get my head around. Both my parents died when I was very young and so I don't really understand what a pension brings, when they never got to see theirs. So, I have never seen the benefit either and it would therefore take a lot for me to think that is a sensible thing to do."
Who can argue with that? Besides being a powerful insight to this incredible lady's relationship with money and the future, as well as it being another clear indication of the importance of sitting and listening to clients, ultimately it made me think about the word, and the meaning of ‘Pensions’.
I don’t like the word pension...
The same as I don't like the word retirement. Retirement just makes me think of when my great Nan used to go the post office to collect her state pension. I loved her but she was old and frail and retirement to me has always seemed, you know, for old people.
I don't have a better phrase for it, not yet anyway, I am open to suggestions until I find one. For the purposes of today, I will call it Your Unknown But Super Exciting Future (or YUBSEF for short). However, I do have strong views on what it looks like.
Typically, we are living longer and the state will not be there to bail us out in later life. Plus, generally, most of us want some endgame in sight - be it to do something completely different, or at least know you have ‘enough’ (see what I did there).
Then there is the death of ‘real’ pensions, these are the final salary schemes that big corporate firms are paying the baby boomers (your grandparents and parents) to have that seemingly stress-free post-work life.
So, we do need to save for our future, but how? Well, pensions, as they are largely known, are quite effective, when you remove the word pension. They offer tax breaks on the way in, they offer tax free growth for the duration, and because you cannot typically touch the money until your mid to late 50s, they make you behave and invest for decades, which we know is the safest shortcut to long-term wealth.
Importantly, back in 2015, the government changed the rules and made pension death benefits more favourable. Your pension pot used to be counted as part of your estate - should you find yourself in the unfortunate situation of an early demise without having had the opportunity to spend this money. Now, in this unfortunate situation, your money remains outside of your estate.
What does this mean, well, if you have £500,000 invested for YUBSEF (which just so happens to be within a pension wrapper) previously, assuming your overall estate was large enough, you would pay £200,000 to the government on your death. Current rules mean you would pay £0 on your death and the money is passed directly to your beneficiaries free of any tax. They will have tax and planning considerations when the post lands with them, but that is for them and theirs to worry about.
So not only does the pot save for YUBSEF, it also protects this money for the long term, for your loved ones. But, unlike a other complicated means of getting money outside your estate, if you still need this money, then it is actually yours to spend. Win win.
Do I think you should invest for YUBSEF? Absolutely.
Do I think you should utilise some of the tax efficiencies of an investment called namely by the public a ‘pension’? Well yes, in most circumstances this is right.
Should we call it a pension and think it is for retirement? Nah.
Pensions and retirement are lame - investing for Your Unknown But Super Exciting Future is super cool.
Parting thoughts from a philosophical wannabe from Hemel Hempstead...
We are so privileged to be able to listen to such deeply personal stories. You learn more from a client meeting than you do from reading 1000 financial text books.
Alfie Mullan, July 2018