Cash in your Pension
Cash in your pension and use the money NOW, scream the adverts, and give your loved ones access to funds when you are gone. It sounds attractive doesn’t it, especially if it is from scheme where a future pension income is “locked up”. Why wouldn’t everyone do it, surely it is a no-brainer? Well, funnily enough, there are some very good reasons to consider the status quo that the “Cash in your pension” internet adverts fail to mention.
Have you met someone aged 75 forced back to work, forced sell their home, forced to mortgage the children’s inheritance or to borrow off family and friends? Well, we have and invariably they are fit and relatively healthy but their nice relaxing retirement has turned into a nightmare resembling a financial prison!
Recently, the regulator in the UK, the FCA, conducted interviews with the public and discovered that many do not understand the implications of taking tomorrow’s pension funds today! While it may seem attractive to cash in your pension, it is clear from the FCA, that:
- Many are moving from final salary schemes without understanding or facing the risk of longevity- this is the risk of living after the fund has been spent, leaving the pensioner to live on state benefits only. (In our experience this leads to financial hardship and debt in the UK)
- Many older pensions have guaranteed annuity rates – pensions that, in some cases, offer 8% to 10% guaranteed income from the fund in retirement. Many offer inflation linking which is a significant issue (not being explained to people when being told to “cash in your pension”. Cash in your pension and then try and match these benefits. It will be impossible!)
- Many are cashing in the pensions and, interestingly, being advised to invest the funds* without understanding that, from a taxation perspective and protection perspective, is unwise. (Our experience offshore is that people are being told to invest in “investment bonds” for reasons of commission which increase charges 100-200% above existing pension charges in the UK. People are not told about double tax arrangements or the benefits of retaining the monies in a UK pension, or they are directed towards a QROPS / ROPS – again with the aim of funds being invested in the same investment bonds unnecessarily).
*This final point may give the impression of personal control or extra flexibility, as far as provision for the future is concerned, but it seems driven by advertising slogans which dwell on the lack of trust in pensions historically (sometimes from 30 years ago).
Tax Benefits Lost
Cashing in a pension may leave you with Income Tax to pay if you take more than 25% out of the fund, and that income tax will be applied as per the double tax treaties where you live. New rules, imposed upon trustees, ensure that taxes are paid on transfers linked to QROPS from April 2017.
Funds in a pension are not liable to personal Capital Gains or Income Tax, but funds outside a pension usually are. Even investment bond funds pay taxes internally, and many countries do not recognise investment bonds, especially within other wrappers such as QROPS and tax them according to their rules!
Pensions are usually free of Inheritance Tax, contrary to adverts. In many countries (not all) they are are subject to wealth taxes.
Cashing in a pension will result in the funds being added to your house and other assets when assessing Inheritance Tax or wealth tax limits. It also removes the pension fund protection for bankruptcy and legal action. This may seem unimportant until you get sued for something, or indeed another country imposes financial sanctions.(Yes, we have seen this in reality and pension funds in the UK are pretty much untouchable, whereas investment bonds in an individual’s name or even in trust form part of an estate in many cases for many years).
The FCA has reported on the problems stemming from the new Pension Freedoms.
There will be fallout from this FCA report and criticism of how pension freedoms may have disadvantaged many that did not take advice, or were given poor advice, or indeed mis-led by “cash in your pension” adverts that dwell on access for the now.
This fallout probably could have been avoided if the Government had taken the trouble to listen to the pension profession’s warnings over the last few years, including our own voice.
Given the complexity of the rules since Pension Simplification in 2006 and Pension Freedoms in 2015, investors should always try and take advice from a suitably regulated and qualified adviser – ask for evidence.
Indeed, if the advice is unregulated, then you have often have no protection if things go wrong. Otherwise, without protection, you will just join the many thousands of people who have lost money and now campaign retrospectively, these people are often retired but forced back to work.
Our message, don’t believe any website that sells the concept of cash in your pension and lists several reasons for so doing. They are doing it to earn up to 10%(or more) commission from your fund, and have no interest in your future whatsoever.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was published on 18th July 2017
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