Pensions, pensions everywhere
January is normally quite a depressing month. Grey, cold and broke,it’s no wonder that people’s thoughts are turning to retirement. The Government are publishing new rules on State Pensions today, that should be good news for most people (or so they say). But if you can’t wait that long (likely to be at least 67 for anyone under the age of 50), beware of trying to crack open a private pension pot instead.
The broad themes of the changes to State Pension have been around for some time. Instead of having a two-tier system (as we currently do), with a basic State Pension topped up with some additional cash if you have earned enough over your working lifetime, the new plans (effective form 2017) will have a single state pension figure of abround £140 in today’s terms. The current maximum with full S2P entitlement is about £145. Already this is not looking like good news for everyone.
Also, the current minimum contribution history is 30 years- this will increase under the new rules to 35 years, maintaining the fiction that the National Insurance Contributions we pay are actually going into a pot to pay for our own (rather than current pensioners’) dotage. Again, this is less ‘good’ than ‘making you work longer’ news. And if you worked (and paid NI in the UK) for less than 10 years? From 2017 you can forget it. The Government is just keeping your cash, thanks.
All this means the pension ‘package’ will apparently not cost any more, but will benefit loads of people. Not the people mentioned above obviously, but the low-paid and some women with patchy work/contribution records owing to having children, will be better off. So that’s OK then.
Of course, people coming up to retirement shortly after 2017 and those who have already ‘contributed’ into the S2P (or SERPS as it was beforehand) might be slightly miffed. Fear not, we are promised transitional provisions, and possible ‘protected rights’ on contributions made before the cut off. So for a while at least, there may still be some getting more than the universal pension.
But what if you can’t wait to get your hands on your lovely pension cash? The major flaw in pension saving is the fact that you can’t get your grubby little mitts on the money until you are too old to enjoy it- the tax reliefs offered are the only way the Government could convince people to put money in at all. And if times are hard, like now, perhaps you are thinking that you’d like to ‘liberate’ your pension funds now, while you are still alive to do them justice.
And there are numerous companies who will offer to help you do just that- for a price. Extracting money from your personal, or even company pension scheme is easy, provided you are prepared to lose at least 20%-40% of it in arrangers fees, not to mention all the tax that will be due once HMRC comes after you, which could be up to 70%
Take this example from the Telegraph:
You have a pension worth £60,000 and a pension freedom fighter approaches you to tell you he can get you your money sooner than the age 55 prescribed by HMRC. He tells you it’s a loophole but that it’s complicated, so you will have to pay a fee of 20%, or £12,000.
Through a loan or other reciprocal arrangement, often involving a SIPP (Self Invested Personal Pension) and offshore shenanigans, you get a cheque for £48,000.
Unfortunately, HMRC then sends in the heavies asking about an unauthorised payments charge due on your liberated pension. The charge is 55pc of the total amount released (before paying the freedom fighter his charges), so totals £33,000. You are left with just £15,000 and in addition, you may also be liable for penalties and interest on the unauthorised payments.
You also now have no pension. If you had just waited until you got to 55, you could have taken £15,000 (25%) from the pension as a tax-free cash lump sum and drawn an income from the remaining £45,000.
Still, at least the scurrilous pension liberator is happy.
These companies are apparently spreading like wildfire, and as fast as one is shut down (which normalyl consists of turning the website off), ten more spring up in their wake. Some SIPP providers such as Hargreaves Lansdowne and Standard Life have started refusing requests to transfer SIPP funds to such scoundrels, aware that they are looking a bit nannying, but feeling it would be irresponsible to allow the transfer.
If it sounds too good to be true, it probably is. Just wait to get your pittance when you're old like the rest of us.