A national newspaper article with the headline ‘Pension Pot Gamble’ caught my eye recently, so I thought it worthwhile to revisit the vitally important subject of pension freedoms.
The article highlighted that in Australia, where pension freedoms started 20 years ago, a massive 40 per cent of pensioners are now running out of money before they are 75 years old.
These days, 75 is no age at all, so it is not difficult to imagine the human misery which lies behind that cold statistic. Too many people, who in their 50s had looked forward to a comfortable retirement, are now bereft of their extra income and left to struggle on whatever state pension the government of the day decides it can afford.
On the same day I read the article, I received a call from an experienced IFA facing the dilemma of how to advise a long-standing client wishing to cash in his final salary pension.
His client, in his mid-50s, wished to transfer £200,000 from a final salary scheme and then take the cash out to invest in a failing business. “Definitely not, don’t be a fool”, I hear you cry.
I agree. However, let me add a few more details. The failing business belonged to his wife who recently passed away. He has now become the new owner.
His final salary scheme is an old one, though the fund continues to enjoy uplifts and could be more than £250,000 at 65. There are also other property assets of £750,000 net.
What should he do – risk all or play safe?
If he cashes his pension and the business fails, he loses everything. If it survives, it could become a win-win situation.
These are the challenges advisers face in the world of pension freedoms. Sadly, I believe people are being misled by the government into thinking that cashing their pension is an easy, risk-free, option, without considering the long-term implications.
My question is always, “how would you have solved the problem before pension freedoms?” This approach can help a client realise how nonsensical it is to cash in their pension.
Encashing a final salary scheme can only be justified in the most extreme situations.
Advisers must clearly spell out to clients all the reasons why the pension should not be cashed and, if they insist, they must acknowledge the advice in their own hand and words.
Ken Davy is chairman of SimplyBiz Group