“Leave their children enough so they can do anything but not enough that they can do nothing.”
January is gone, and we march on. The month that people love to hate has sailed, or been blown, into the distance. Prior to having children, I was one of those really annoying people who quite liked January, as I’d try to be away skiing at some point. That concept now, alongside a clean house and peaceful mealtimes, are sort of fuzzy memories. I have a faint recollection of such times, but nothing more.
However, this isn’t a newsletter focused on the travails of parenting – although my social media clearly thinks that’s all I do, as it’s just an endless stream of dad humour – but instead the enthralling, encapsulating, and often bizarre world of personal finance.
And there is a treasure trove of material this month, so let’s get straight to it.
PS: Thanks as always for the kind comments re these scribblings. If you know of anyone else that might find them entertaining, please do ping one on to them. The full back catalogue is here.
Hallelujah – who ever said that complaining doesn’t work!?
Ladies, gentlemen, dogs and cats, a good thing has occurred.
For many people, their first withdrawal from their pension is a bit of a timestamp. Their official transition from the world of salaried income to true financial independence. They have their little nest-egg, carefully built over the decades, that they now hope to dutifully care for and monitor in the hope of many years of fruitful returns and seamless payments. They have “paid their dues”, so to speak, and now it is time for the golden goose to return some of the treasure.
Imagine – we are interrupting this thought-experiment with a quick bit of context. Assume the person in question is using drawdown to access their pension, and the taxable income section only. Just roll with it – our newly-retired protagonist requests a withdrawal from their trusty pension company. It’s a nice round figure of £30k, to give them their spending for the next 12 months.
All is well in the world. Indeed, the money is already being mentally spent. Holidays, good food, a colourful doorstop, you know the drill. The day of the big withdrawal approaches.
And then, confusion and calamity collide, in truly British fashion. Our protagonist was of course expecting some tax to be deducted, but what is this madness?! Some 45% of the expected amount seems to have been shamelessly deducted by our HMRC overlords. What on Earth has happened, our retiree wonders, how very rude of them.
“Emergency tax, indeed, I’ll give you an emergency.”
This happens, of course, because HMRC have told the pension company to apply “emergency tax”. Two dreaded words that rank alongside phrases such as burst pipe, flight cancelled, and “Dad, I’ve painted your shoes for you”.
Despite the legions of pension company call-handlers being erm, let’s say verbally challenged for having the audacity to apply the wrong tax code, the issue stems entirely from HMRC. I know from good experience just how (understandably, to be fair) irate some people become, given that I once manned the telephone lines for Prudential’s pension dept and was on the receiving end of some of that “feedback”.
This is of course written largely in jest, but unfortunately, it is entirely based on a true story. Hundreds of thousands of true stories, in fact.
However, praise be! salvation has cometh! Common sense, that very welcome and increasingly rare wonder, has been sighted at HMRC. Emergency tax on pension withdrawals will soon be a distant memory. Hurrah!
Seriously though, a big well done to all at HMRC for getting this sorted. It was a needless inconvenience, an irritant that, like most irritants, we just didn’t need.
More of this good work, please and thank you.
Marginal Tax Rates
I’ve been thinking about this more recently, especially following the excellent work that Dan Neidle and his team at Tax Policy Associates have compiled.
As a quick recap, your marginal tax rate is the rate of tax/deduction on the next pound that you earn. Not the total that you’ve earnt for the year, just the next one.
Unfortunately, I’ve come to the realisation that our current tax system is in need of drastic overhaul. It’s borderline bonkers, and it could easily be argued that we are stifling some of that precious economic growth-baby-growth that the chancellor is after. I’m not alone in this thinking.
In Dan’s interactive graphs, we have the following examples:
Someone in Scotland earning £43.6k to £50k faces a 50% loss of employment income in that bracket. I really struggle with the principle of taking half of earnings off of that wage bracket.
If an individual/couple receives child benefit, due to the child benefit tax charge the rate of loss is 57.5% (rUK) and 59.5% in Scotland on earnings between £60k-£80k.
Total deduction on earnings between £100k - £124.5k is 62% (rUK) and 69.5% (Scotland). Add in student loans and it goes to 71% and 78.5%.
Comically, given that we are meant to have a progressive tax system, the rate decreases to 47% (rUK) and 50% (Scotland) on earnings above £125.3k.
Then there’s VAT, in general.
Looking at those numbers, surely the case for urgent reform is obvious, regardless of how challenging it would be politically.
I appreciate it is just one isolated example, but I’ll throw it out there anyway. In the UK, we start to repay child benefit at £60k of individual earnings (so in theory a couple could earn £120k jointly, providing the earnings were shared equally) and lose it entirely at £80k.
A couple each earning £60k would retain all of their child benefit, whereas a single parent on £80k would have to pay back everything. I know, I know.
In the US, and it’s almost funny, but they don’t start to pay back child benefit until they earn a whopping $200k as a single person, or – get this - $400k as a household. Yes, one example is relatively useless as a proper comparison, and they have their healthcare costs (although often that is covered via their employer), but still.
That said, what can we do? In some ways, I am railing at myself for railing at something I can’t change, but hopefully the, let’s say “room for improvement” can be highlighted. Perhaps the more we take notice of it, the greater the chance becomes of these things actually being fixed.
Sort of like emergency tax on pension withdrawals, for example. Things do get better!
The Buffet Legacy
Presumably, most people reading this newsletter will have heard of Warren Buffet, arguably the most famous investor of all time. Certainly one of the most successful.
Known as the "Oracle of Omaha," In 1956, Buffett founded Buffett Partnership Ltd., which eventually acquired a textile manufacturing firm called Berkshire Hathaway.
Berkshire Hathaway has morphed over time into one of the largest investment companies in the world and the household name that we have likely heard of. At the time of writing, it is the 10th largest company by market capitalisation in the US market. It is a behemoth. Although their website is from a bygone era – yes, that’s the real one.
If you have time, the annual Shareholder Letters are a treasure-trove. Strong recommendation.
What you may not know is that Buffet intends – and has done already – to give away the vast proportion of his mind-boggling wealth to philanthropic causes. He released a letter in November 2024 that documents his thoughts on the matter, and I think you’d enjoy it. Some highlights:
On discussing his late wife’s gift to their children: “These bequests reflected our belief that hugely wealthy parents should leave their children enough so they can do anything but not enough that they can do nothing.”
(Some would say that £8m is more than enough to never do anything, but let’s let that one slide)
On his recommendation that you should read and discuss your will with your children before you sign it:
“You don’t want your children asking “Why?” in respect to testamentary decisions when you are no longer able to respond.”
His lack of ostentatiousness was a trait he shared with the legendary Jack Bogle:
“As a family, we have had everything we needed or simply liked, but we have not sought enjoyment from the fact that others craved what we had”
Optimism Prism
Your monthly dose of the good stuff:
Three hillwalkers rescued after facing ‘challenging’ conditions in Cairngorms
Runner Completes 268 Mile Race–18 Months After Being Unable to Walk Due to Brain Condition
Recommendations
I might have recommended this before, but if you’re a history geek like me, these podcasts are a superb listen.
Not something I ever thought I’d write, but I was convinced recently. They’re pretty great.
That’s us for this month!
All the best,
Andy
The compliance bit:
This newsletter is for information purposes and does not constitute financial advice, which should be based on your individual circumstances
The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested.
Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal circumstances. Taxation and pension legislation may change in the future.
Drawdown pension plans (unsecured income) are complex and are not suitable for everyone. Pension decisions can affect your income for the rest of your life (and that of any partner and other dependants). Where benefits are accessed on a flexible basis, these are not fixed or safeguarded for life. If security of income is important to you then you should consider purchasing an annuity or taking a scheme pension to provide a secured level of income.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen
