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Any BENEFITS in cashing in all your Pension now?

Pensions Freedom? Its SHAMELESSsocialsecurity

Any BENEFITS in cashing in all your Pension now?

For a lot of people the approach of the 6th April 2015 is filled with excitement and trepidation.

Why?

well from that day an unprecedented level of freedoms are being granted to money purchase pensions such as Personal Pensions, SIPP'S etc, Final Salary Pensions are excluded from the new regime unless you transfer your benefits away.

What can you do in the new regime? well you have the 

Freedom to

  • You will have a right - in theory at least - to gain full access to your pension from age 55
  • No one will be forced to buy an annuity
  • Choose your own level of income
  • You will be able to cash in your pension in one go - subject to an income tax charge
  • You will be able to make withdrawals above your right to tax-free cash - subject to an income tax charge
  • Pass on Pension pots free of Inheritance tax on death (Under age 75

In todays, Telegraph on Sunday the Prime Minister talks about trusting people to make the right choices.

Will everyone make the right choices? NO 

I sincerely doubt that they will, there are so many catches and issues that have to be considered before spending a pension pot that in some cases have taken thirty plus years to be built up to its current value.

Lets look at a simple fictitious scenario and see what can happen?

  • Mrs Jackson,
  • aged 58,
  • with two grown children,
  • living in her 2 Bed council house with the Right to Buy,
  • on £8,000 per year income,
  • her house is valued at £100,000
  • Maximum right to buy discount of 70%
  • She can buy her house for £30,000.

Through careful saving, she has accumulated a pension pot of £36,000.

After looking at the new rules, 

She does some calculations and works out that an Annuity would give her an income of £1,656 a year or £32 a week, and she is losing more than that as a result of the Bedroom Tax.

Then she works out that if she cashes in her pension pot she will receive enough to buy her house outright.

Mrs Jackson thinks this makes sense, and is the right choice as

  • if she continues to rent the property, she will still lose benefits entitlements, due to the Bedroom tax.
  • She will own a £100,000 property which she can pass on to her kids.
  • By owning the property their is no bedroom tax.
  • When she retires she will still get her state pension and any other benefits entitlement.

Now, Mrs Jackson is not a fool, she has looked at and weighed all the options and decides to go ahead and cash in her pension, as she has swopped a £36,000 pension pot for a £100,000 property.

Unfortunately, when she reaches pension age, Mrs Jackson has no Pension Savings, and she has retired and has no Income.

So Mrs Jackson applies to the Department for Works and Pensions for Council Tax Benefit, at which point she finds out that her actions at the age of 58, affect her entitlement to State Benefits, as the lump sum that she had out from her pension, the DWP treat as “deprivation of capital with the intention of securing or increasing benefit entitlement” 

This means that the DWP will still treat her as if she effectively still has that pension pot and was drawing an income from it, and that rate is at a higher rate than an Annuity would have achieved.

So, potentially the DWP would treat it as a capital sum of £36,000 creating an income of £2,700 instead of the £1,656 she would have gotten from an Annuity, and although not confirmed as this could be counted as a capital sum above £8,000 meaning that she would receive no entitlement to benefits,

Thereby trapping Mrs Jackson on the Poverty Line, unable to afford home improvements, and trapped in her own home unable to do more than survive, eventually turning to Equity Release as a means to maintain her home and to survive. 

Eventually Mrs Jackson, has no equity to pass on and yet the shadow of her pension pot still follows her.

So Mr Cameron, you trust people to make the right choices, and yet anyone wanting to transfer over £30,000 from a defined benefit scheme, has to prove to the trustee's that they have received advice and yet there is no similar requirement needed for anyone who wishes to cash in their pension pot.

I personally believe that everyone thinking of cashing in their pensions now should receive advice and there is no substitute for Advice from a suitably qualified professional Independent Adviser.

Regards

Lee Clarkson

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