The heating engineers were at my house this week; fitting a new boiler – an energy efficient system for the future. I’m hoping my significant investment in this means it’ll last for twenty years or more.
The striking similarity to pensions struck me. That getting a new boiler was something I knew I needed to do, but had been putting off until it became urgent (mine had broken) and that although I was vaguely aware of the necessity for a more energy efficient system, I didn’t understand the detail at all. I consequently relied on the usual sources of information – advice from friends, research on the internet and the ‘expert’ opinion of the heating engineer (who, in truth, was also trying to sell me his services).
I’m far more confident in the area of pensions of course but, let’s face it, how many people’s knowledge doesn’t extend beyond the ‘vague knowledge of its necessity’ and how many are cognisant of the relationship between taxation and pensions? – the tax efficiency of the pensions system if you like.
When we talk about tax and pensions, of course, we often start with the efficiencies associated with saving. In the UK we get tax relief at the highest rate of tax we pay on our contributions into a pension arrangement (provided it’s an approved arrangement of course), and the investments in our pension pot also grow tax-free. The saving is straightforward enough, but in my experience, few people understand how this relates to the cost of their contributions.
So, where should we start when it comes to approaching tax issues with members?
1. Tell people what it means in a way they understand
The simple solution is to explain to members what the real cost is to them. This is the most important piece of information for individuals starting out on their pensions journey. Interactivity is effective here - a simple cost calculator quickly and clearly presents the financial impact to members. If this isn’t an option, consider the use of case studies, and use clear and direct language. Talk about how the ‘tax man helps you to save’.
2. Beware of the limits
Then we come to the savings limits – the Annual Allowance and the Lifetime Allowance. Some may argue that we shouldn’t worry so much about these, on the premise that if you earn enough to be bothered about them, you can probably pay for advice. I would argue that savings over a lifetime (if we save enough) can run close to the Lifetime Allowance, so it’s worth giving them attention. What about the impact of the £4,000 money purchase annual allowance for those who’ve started to draw money from their pension savings?
3. Use ‘warning stickers’
Just as my new boiler will probably have a warning sticker or two, we shouldn’t be afraid to warn people (in big letters) about paying more tax than they need to. In most cases we are able to segment the audience and warn those most likely to be affected, but if we can’t do that, it’s still better to make them aware. This isn’t about scaremongering the audience – it’s about ensuring they’re safe, albeit from the tax man.
4. Freedom?
And then we get to that sticky matter of Pensions Freedoms and taxation. I’m pretty sure that when Steve Webb talked about ‘the new freedoms enabling members to buy a Lamborghini if they chose to do so’, he wasn’t thinking through the punitive tax implications of someone withdrawing the value of a super-car from their pensions savings in one go. In fact, HMRC has probably collected much more than it ever expected from those cashing in their pensions, in line with the new freedoms, and paying tax at the highest rates possible, without realising they could have saved a shed-load of money from the tax-man, just by spreading their withdrawals over a couple of years.
It’s clear the public at large need help when it comes to tax and pensions but, what are we, the experts in the room, able to do about it?
5. Remember the power of a simple video
Interestingly, when I returned home to check on the progress of my heating engineers, I was handed a new wireless control and directed to an online video to explain how to use it. Sites like YouTube have become a practical solution to so many of my household dilemmas – from making a roman blind to linking up my Alexa with my sound system (I know, first-world problems!). If it’s obvious for other complicated systems, then there’s no reason for us to not be harnessing the power of a simple video.
Perhaps there is hope for an understanding of pensions and taxation after all!
Karen Partridge, Head of Client Services at AHC
