Cost of living crisis: Cashing in pensions to pay bills could be very risky | money
IIf you’re struggling with the rising cost of living, it might be tempting – if you’re over 55 – to start saving for retirement. The Guardian can reveal that many who won’t turn 55 until next year are being targeted by pension funds, which are urging them to “get the ball rolling” and release cash now – although experts say this is a very bad move for some as they may be worse off in retirement and may even be out of money.
Former Pensions Secretary Steve Webb told the Guardian that while the idea of using pension savings to help deal with living cost pressures like household bills – or to pay for luxuries like a big holiday – is “very alluring”, there are many reasons , why people should be very careful.
In 2015, the government introduced reforms that gave the over-55s much more freedom to use pension money. For example, there are millions of people in their 50s and 60s who are still working and who—in theory, at least—can access their pension funds and use the money for whatever they want.
One of the big draws is that the first 25% you free up from your pension is tax-free.
But aside from the obvious point that this is money for your retirement, there are many potential dangers, including being hit with taxes or affecting your means-tested benefit eligibility.
Readers who have not turned 55 for several months report receiving unsolicited letters — in official-looking brown envelopes marked “Private and Confidential” — from a company called Portafina.
Captioned “Good news on your retirement,” they explain that people over age 55 can free up cash, adding: “It’s your money so you can spend it however you like. And with Portafina you can get the ball rolling from the age of 54.”
It states that popular reasons for freeing up pension funds are to increase disposable income, pay off debt or support children up the wealth ladder.
The accompanying material states that Portafina helps thousands free up tax-free cash every year. It says there is a fee, which ranges from 1% to 7% depending on the size and complexity of your system, and generally comes from your pension, but is only charged if you tell the firm to go ahead and put money on your Bank account free.
Experts say savers should be aware that if they decide to access their pension, they can do it themselves and won’t have to pay hefty setup fees.
According to Portafina, the vast majority (88%) of clients it helps ask the firm to manage their remaining retirement savings for them.
Webb, now a partner at Actuaries LCP, generally comments on companies that target people to tap into their retirement savings and says some of these companies want you to consolidate all of your pensions with them.
“They take your tax-free cash and use it to pay off debt or help family, etc., and they then get fees on top of the rest — advisory fees, platform fees, fund fees, etc., potentially for the next 30 years.”
He adds, “If you’re an active member of a pension fund, you’re probably paying very little in fees.” Transferring money, especially if it’s an active pension fund, “could be a very bad idea,” he says.
Webb says it’s not just low fees.
When it’s an occupational pension scheme run by a group of trustees, “there’s someone watching over your scheme.”
More generally, he says that alongside the obvious impact on living standards in retirement, there are some “hidden risks” that people should be aware of before taking their pensions.
If you start now, building a retirement pot as the situation improves could become significantly more difficult in the future, as your annual tax-advantaged retirement savings limit could drop by 90%.
Currently, most people can save £40,000 a year for a pension and enjoy the benefits of tax breaks. But someone ‘flexibly’ accessing a defined contribution pension pot (aka cash purchase) worth more than £10,000 can trigger the annual cash purchase allowance, which lowers their annual limit to £4,000.
The first capital withdrawal can sometimes trigger income tax at the emergency rate. If the annuity provider does not have a standard tax code for a saver, HM Revenue and Customs rules require them to deduct tax at an emergency criminal rate as if the saver made multiple withdrawals during the year.
Someone who withdraws more than they originally need and leaves the rest in their bank or savings account could see a deduction from the benefits received. In extreme cases, they can even be completely excluded from benefits. For example, Universal Credit takes into account all savings over £6,000 and applies an absolute limit at £16,000, disqualifying anyone with savings over that level.
Portafina tells the Guardian that it “endeavours to provide a valuable service to customers in real need” – typically people who need to access money for “significant life events and unforeseen circumstances”, generally before their target retirement date. “They are typically not financially secure and have often not used (or can’t afford one now) a financial advisor in the past.”
It adds: “We recognize that taking out pension money early to meet immediate needs means less provision for the future, and while we think most people understand this, we emphasize that point in all of ours marketing materials and also highlight our consultation process…
“We generally don’t recommend taking money out of pensions unless there is a real cash need that can’t be readily met by other means. That’s why a relatively small part of our initial inquiries are more likely to be recommended.”
Portafina broadly agrees that taking benefits from an active pension pot is generally not a good idea, particularly when there is an employer adjustment, but that in some cases it might be preferable to other options if the need is urgent.
On consolidating annuities, the company says it will depend on individual circumstances, adding, “Our recommended annuity providers and funds that we recommend transferring or switching are of the low-cost, passive investment type… We recommend.” not high-cost, active or esoteric investments or structures.”