On the Money

Here’s a tip: take my advice, don’t ignore it

Alan SteelHardly a day goes by these days without someone moaning about charges for financial products.

If it’s not “hidden charges” disadvantaging private pension holders, it’s how academic research proves you don’t need hard working experienced fund managers anymore. We’re told to simply follow tips from unqualified media experts and stick your money in passive trackers.

And while you’re at it, don’t bother putting money in a pension fund, what with the crap performance AND the rip off charges. Just stick your money in cash Isas, or even better dinnae bother saving at all. Just spend your money on smartphones and iThis or iThat, go on three holidays a year and blow the rest on a new car every two years.

No wonder hardly anybody gets to retirement with decent income. Never mind financial freedom. Even in the world’s wealthiest nation, the US,  I read recently that over a third of folk over 55 years old faced with a $500 bill out the blue wouldn’t have the savings to cover it.

You couldn’t make it up.

Albert Einstein, when asked what was the best ever discovery of mankind, replied: “compound Interest”. So, let’s think about private pension plans from that aspect and from basic principles.

Number one: every pound you invest is increased thanks to the kindness of HMRC. Basic rate taxpayer? No problem. Here’s an extra 25% from us, free, though it’s not quite so simple.  Forty per cent taxpayer, sir? Aren’t you the lucky one. Here’s an extra 67% from us to stick away for your future.

What? You pay tax on the margins at 45%? Poor you. Tell you what, stick money in your pension plan and we’ll add on eighty odd per cent!

What’s the catch, you wonder? All the growth from day one in your fund isn’t taxed either.  And if you die too young (before age 75, that is), the whole shebang is free of Inheritance Tax and any other tax you care to mention. No kiddin’.

Oh, did I mention, if you’ve updated the documents attaching to your pension plan, and snuff it before you’re 75,  all your “nominated” beneficiaries including your children and grandchildren can pick up lump sums or income for life all tax free.  Over 75? Do ask about our special recent updated tax efficient terms today. And do check these features are available to your old plans too.

All that apart, and for the vast bulk of private pension holders, you can currently take a quarter of your fund out tax free any time after age 55 and still keep the tax benefits. But why would you, given the whole lot sits outside your estate on death?  No tax and no lawyer fees either. Sounds good to me.

Get the right advice on all this and you’ll never question again why there are charges. You’ll be so busy boasting about the benefits, especially if you’ve been exposed to the best active managers over the last five years instead of being obsessed in avoiding “risk” or costs. Go check the numbers.  Nullius In Verba….. dinnae take anybody’s word for it, check for yourself.

Now a quick lesson on compound interest. Get a piece of paper and a pen. Draw a line along the way, four inches will do.  At the left hand side write 40, and the right hand side 60, according to research the age which most folks say they want to be financially independent. 

From 40, draw a line straight down another four inches….write 40 on that point.  Now join the third side of the triangle up to 60.  On the level line, go along an inch and write 45. Take a line straight down from there to join the third line. 

Now you have two areas, one from 40 to 45, the other from 45 to 60. Here’s the point. At any decent growth rate the amount at 60 coming from the first five years’ contributions is the same as the remaining fifteen years. So the earlier you start taking this seriously the better. It’s not a straight line to retirement , it’s an uphill struggle.

Finally a quick lesson on life. Today as I write this I attended a funeral of a client who I’ve known as a friend since we were six.  He was six months younger than me.  It was the fourth funeral I’ve attended in two weeks.  Two of the others  were also below 75. No, this is not a final tip on tax freedom, just a point that was discussed by our friends on the day. How did we get this old so quickly? Where did the years go? 

So don’t wait any longer in getting your financial affairs sorted out.  Get it done now. And concentrate on value and benefits for goodness sake, not how much it costs.

Alan Steel is chairman of Alan Steel Asset Management

Alan Steel Asset Management is regulated by the Financial Conduct Authority. This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.


This is a regular column submitted via the DBdirect service. For details click here.


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