April’s 2015 pension freedom reforms were regarded by many as a revolution.
The headlines at the time warned of a doomsday scenario where the great British pensioner would blow his or her hard-earned pension savings on a Lamborghini and spend the rest of their dotage in penury.
That hasn’t proven to be the case - yet. Although early numbers suggest good old British pragmatism has prevailed, I believe the real risks of this policy will take over a generation to manifest themselves.
According to the Association of British Insurers the changes to the rules saw nearly £6b in cash released from pensions between April 2015 and the end of December 2015.
A total of £3bn has been paid out in 213,000 cash lump sum payments but the average amount released has been £14,800. In practice this means a lot of small pots have been withdrawn.
Rather than flashy sports cars, it seems the Baby Boomers have been spending their payouts on more modest items, perhaps conservatories, kitchen renovations or even reducing debt (although that’s probably wishful thinking).
So small are some of the sums being cashed in, it’s likely most of these withdrawals are small pension pots (under £10,000) which would generate precious little annual income but do amount to a nice one-off treat.
In my view those who have cashed in their pension pot and promptly spent it should be aware of the ramifications. Due to a rather complicated set of rules known as “deprivation of capital” I fear some could be in for a shock.
Essentially, these rules mean those who do cash in their pension, spend it and then go on to make a claim for additional state support might find themselves in a spot of bother.
Under the deprivation of capital rules, if you spend, transfer, or give away any money that you take from your pension pot, the Department for Work and Pensions (DWP) will consider whether you have deliberately deprived yourself of that money in order to secure (or increase) your entitlement to benefits.
If it is decided you have deliberately deprived yourself, you will be treated as still having that money and it will be taken into account as income or capital when your benefit entitlement is worked out.
I think it is important as an industry we make sure people are aware of the DWP’s stance. If you exceed the means tested level - whether you blow your money, lose it or allow it to be eaten up in charges - you will be penalised.
No further incentive is needed for savers to keep a close eye on charges and to think carefully about how they spend or access their pension pots when the time comes. For those who find themselves in this position, pension freedom might be more aptly described as pension serfdom.