(Literally pay, I’m not suggesting a revolution)
Warning: I am not a pension advisor, tax solicitor, or stockbroker. I am not a pension investing expert. I am not an expert in any field at all and I am entirely unqualified to advise on any topic. I believe tax should be paid, but I also agree with reducing one’s tax burden, where legally possible. I am a swing voter. I am not political. All recommendations are not affiliates.
First, thanks for all the compliments and the complaints. As ever some of the complaints were hilarious. Congratulations to all those who contacted me for help to open brokerage accounts, I hope the market treats you well. To the person who complained that these were rich people’s problems, I will reiterate that you sounded work-shy to me and you should perhaps try harder.
Today’s topic of pensions for crew was requested by a couple of you, thanks so much for the request, I will happily take more.
Pensions and Crew
It is a minefield but not to be ignored, you should absolutely get on the wagon as soon as possible and the sooner the better. Money, like good decisions, compounds over time. For the sake of simplicity, I’ll do the pros and cons and then we can dive a little deeper.
PROS
-Great way of offsetting tax.
-If a basic rate taxpayer: the government will add 20%, which is free money.
-If PAYE: it offsets tax or sometimes a free top-up from the government or a tax break and the employer makes a donation. Free money.
-If a private pension: a tax-free lump sum at retirement to clear the mortgage or buy a sports car and a flat cap to go with it.
-Compounding sums.
-The government doesn’t want you to depend financially on them in your latter years, so you will get plenty of perks and support.
-As you get older you will likely vote more as a demographic, giving you increased voter protections for your pensions. Just look at the ‘Triple Lock’.
CONS
-If structured poorly, you will get taxed on the way out and more than the government add on the way in.
-The government knows where the money is and may be planning a future raid.
-Pension legislation is constantly changing at every budget.
-The state pension age will keep being increased.
I’ll start with the state pension. You make your contributions through your national insurance payments. To qualify for your full state pension, you need 35 years of contributions. Where do I check this I hear you say:
Government State Pension You will need your government Gateway.
You can top up missing years, but there are deadlines for top-ups for certain past years.
At the moment, (as of the 9th of May 2024), if you have the full entitlement you get £203.85. As we all know this will barely cover food and utilities. You can do this at 66. For simplicity state pension pros and cons:
PROS
-It is a pretty good deal.
-At least if your life turns into a financial car crash, you will always have this to fall back on.
-This money can be drawn abroad. In some countries, this amount is a king’s ransom still.
CONS
-The government will most certainly keep increasing the age.
-There is always the risk they may cancel the state pension.
-At the moment we have the ‘triple lock’ and the government keeps the silver surfers happy because the baby boomers can swing an election, as they die and shrink in volume the government policies will change.
-Constant changes by the government. Driving up your labour and creating a Monty Python-like moving target to hit.
In short, you also need a secondary pension plan if you don’t want to end up in the poor house. These are your basic options:
- Fully automated pension providers. Legal and General and Scottish Widow and the like. Very low hassle and sometimes perform excellently. However, expect charges of 0.75%-1.5%. Doesn’t seem like much does it until you multiply it by 50 years of savings!!!!
- Auto-enrolment. If you are on PAYE your employer will select the plan. As a crew member, you will then get the employer top-up of 3%. Not bad when you start to multiply this number.
- Self-invested personal pension. Take the bull by the horns and DIY it. Use a very low-cost provider and pick up a book at the library.
It is worth noting here that a pension can be started in a different geography.
Auto-enrolment pension tracking can be tricky, make sure you always change the address when you move, so you keep getting those yearly statements. A government pension dashboard is apparently coming soon:
MAPS – Pensions Dashboard. That said they have been working on this for years!
Warning: They are all categorically bastards for hidden fees. Go through the provider’s website like a financial assassin and read every T&C, don’t become a financial victim. Bring your magnifying glass, they will be well hidden.
This old blog might be worth a quick scan: https://www.locationhq.co.uk/blog/shave-thousands-off-your-tax-bill-each-year/ for more background on investing.
Some low-cost SIPP providers:
ii interactive investor does a monthly charge instead of a percentage and doesn’t charge that sneaky hidden 1% on your whole portfolio.
I’ve had a look about and again and Vanguard comes out on top for low fees.
Now the special hell that is tax. I’ll bullet point for sanity with the basics:
- £40,000 max each year, I would suggest based on today’s tax rules.
- The lifetime allowance is £1,073,100. After this, you are subject to additional tax. The government likes to change this number. Don’t forget the interest on your investments.
- 25% lump sum tax-free at retirement.
- Tax perks and donations are on the way in from the government.
- You pay tax in retirement in a similar way to when you worked full-time.
- Unused allowances can be carried forward.
- Your LISA is on top.
- Private pensions can be drawn from 55. if you suddenly decide, you don’t have one more film or TV project in you.
- If you do not follow the tax plan, they are coming for you and you will be skinned.
If you are one of the lucky ones, £40,000 is your new favourite number. You add £32,000 to your pension fund tax-free, the government tops up £8,000 if you are a basic rate taxpayer, free money. If you have a higher tax rate you put in £40,000 and the government gives you a tax break of 20% on this amount that you can claim in your self-assessment. If you are a freelancer or limited company director nowadays, once you hit that £50,000 earnings mark the HMRC are bringing a big hammer for your piggy bank, this is a wonderful way of getting that extra £40,000 in your pocket, you just have to wait for it.
The name of the game is getting your pension tax breaks, government pension tops ups, while reducing the back-end tax.
https://www.gov.uk/tax-on-your-private-pension For a deeper dive.
Record Keeping
Don’t be a sucker, you will become a financial victim if you don’t keep good records.
Tips and tricks:
- Always keep your address updated on all your auto-enrolment.
- Review each year in an Excel with the amount in each account, with the interest received. Charges are always being increased, but also keep in mind exit fees, where you can be severely punished.
- Review your tax position on a yearly basis. You must always plan ahead for back-end pension tax.
- Monitor the performance of your providers and adjust accordingly.
Advanced Tips and Tricks
Currencies crash, civilisations end and country governments collapse.
- Pensions of all kinds can be held offshore. Basically, don’t keep all your eggs in one basket.
- If you are a limited company director, you can start your own pension company fund.
- The basic state pension is called basic for good reason, perhaps consider your retirement in a sunnier spot where you can really leverage the British Pound.
- Pensions both private and state can be collected abroad and perhaps in a jurisdiction that is less enthusiastic about tax collection.
People to help and to watch out for!
- The pub landlord knows more about tax and pensions than your accountant, don’t waste your money. You will be punished if you take their advice as gospel.
- Wealth Managers and Financial Advisors. Don’t be a dummy and put money in their account and have them invest it for you, you will get robbed. 2-5% may not seem like a lot, but over 50 years it is huge. Companies and pension funds also go bust. You are basically making a down payment for their yacht.
- All advisors. No one knows if the market is going up or down even the Sage of Omaha, there are just too many variables.
- Wealth Managers and Financial Advisors. Listen to what they have to say but do your research and always verify. Remember with any advisor you must go in with foundational knowledge or you will not get good value for money.
The tax café is a great place for a deeper dive: https://www.taxcafe.co.uk The website is basic, but they communicate things clearly and simply.
They also do this great book on pensions: https://www.taxcafe.co.uk/pensionmagic.html
The pension game is a cat-mouse between the government and you. Educate yourself, forward plan, and keep amazing records. If you do this well, you stand to benefit significantly financially.
Good luck out there!
Final warning: I am not a pension advisor, tax solicitor, or stockbroker. I am not a pension investing expert. I am not an expert in any field at all and I am entirely unqualified to advise on any topic. I believe tax should be paid, but I also agree with reducing the tax burden, where legally possible. I am a swing voter. I am not political. All recommendations are not affiliates.