Weekend reading

Good reads from around the Web.

The lifetime allowance for pensions1 will drop to £1.25m in April, but there’s still time to do something about it.

If your pension fund is already bigger than £1.25m or you expect it to end up that way – or if you’re on track for a company pension that is the equivalent of a too-large fund2 – then you have until 5 April to claim what’s called “fixed protection 2014″ from HMRC.

This gives you a higher lifetime allowance of £1.5m. To claim it, you’ll also need to stop contributing to your pension, or to tell your employer that you no longer want to accrue benefits.

Money in your pension fund that’s in excess of the limit will be taxed at 55% if taken as a lump sum, or 25% as income – and this is additional to the normal taxes you’d pay on pensions.

In the main it’s high earners on final salary pension schemes who are being told to check whether they’ll breach the limit (although these rare creatures could sell one or two of their unicorns to cover their expenses in old age, anyway).

But compound interest means high-rolling savers with their own pension funds could be hit, too.

A fund worth £250,000 today growing at 8% a year would breach the limit in 21 years, for instance, even without any more contributions.

A £500,000 pension fund growing at 5% would surpass the threshold in 18 years.

Poo-pooing pensions

I appreciate this is likely to be a problem for only a few of you, even considering our unusually money smart readership.

Although I must admit that – optimist that I am – I did quickly check whether I would ever breach the limit! (Very unlikely, as I’ve got far more money in ISAs than pensions for various historical reasons).

More generally, the whole shebang looks like just another complication that will put people off pensions.

The lifetime limit was only introduced in 2006, and it has been all over the shop since then. Who knows where it will be in 10 years’ time?

What’s more, this ability to freeze the lifetime allowance seems designed to reward those who understand compound interest – and who bother to follow the minutia of the changing regulations – at the expense of others randomly left out in the cold.

There’s a reason we don’t write much about pension rules on Monevator. You really need to do a mass of research into your own situation to understand where you stand – even more so than usual – and the ground is shakier than the deck of a cross-channel ferry after a few too many glasses of cheap plonk.

The other reason I don’t cover pensions much is I’m still likely a couple of decades away from drawing mine. I can’t be bothered to learn about them in-depth, only for the regulations to be utterly different when I come to claim my locked-away loot.

Instead, I am simply putting away roughly half of what I put into ISAs every year into my SIPP, depending mainly on my taxes due for the year.3

This is a clumsy way to decide where to save, but successive governments have made it this way.

No wonder people just load up on a lovely tax-free home to live in.

Incidentally, my lack of deep knowledge on pensions means you should definitely read up for yourself on the lifetime allowance if you think you’ll be hit.

There are sure to be plenty of caveats and quirks that I know nothing about.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Nationwide has a new 0% balance transfer card with a handling fee of 0.75%, but you have to be a FlexAccount customer to get it. The Telegraph wonders if it will spark a price war.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.4

Passive investing

Active investing

  • There are two sides to every trade – Vanguard blog
  • Why did Facebook buy WhatsApp for $19 billion? – Dealbook
  • Investors have given up on emerging markets [Search result]FT
  • How to buy the Internet – Institutional Investor

Other stuff worth reading

  • How to end up with £1 million in your ISA – City AM
  • Bitcoin: Bonkers or brilliant? [Search result]FT
  • Meet the Cling-ons [The stressed middle classes: Remixed]The Guardian
  • Peston on the potential for a new financial crisis in China – BBC
  • The truth – and maths – behind premium bonds – Telegraph

Book of the week: All the hedge fund guys are reading a book I’ve recommended here before, The Outsiders. Ironically, it’s a biography of eight CEOs who delivered great returns by being different – whereas the hedge funds now want them all to be the same. Still, it’s well worth a read.

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  1. It’s a bit of a misnomer, as it sounds like a contribution allowance but it’s really a size allowance.
  2. There are rules for working this out, so head to HMRC to read up.
  3. I try to reduce my 40% tax liability, but for basic rate payers pensions are pretty much a wash with ISAs. Yes there’s a tax-free lump sum, but there’s also a tonne of restrictions.
  4. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.”

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