Pension Freedoms – What Could Go Wrong? A Story.

I’ve written plenty of articles on this site giving my opinion on pension freedoms. Despite all those many thousands of words, the best summary was provided in one tweet from Rachel Vahey:

“The biggest risk was never ppl would blow pension cash in a one year. The biggest risk is they run out of money in 10-15 yrs time.”

We will advise our clients the best course of action to achieve their aims. However I still fear that the long term economic impact of these changes is going to be disastrous.

(I also think that George Osborne is trying to buy himself an election by using the huge tax take from these changes to offer tax cuts and that history will judge him as one of the worst politicians this country has ever seen. However that is more of a political point and not really relevant to this article. Still. As I’m here.)

But what about people who do not take advice. The media have been quick to offer their ‘guidance’ – with many inaccuracies. The DIY market is booming as people decide they don’t need advice (again, fuelled by media ‘guidance’).

So what could go wrong? This happened today, just 3 working days in to the new rules coming into force.

We took a call from an accountant. She was sat with a client who was in a bit of a panic. He had a Major Provider pension, a SIPP, worth around 120k. He cashed it in under the new rules. He was holding a cheque for £67k. He was shocked.

It seemed the full extent of the tax liability had not been explained to him.

What, we asked, was the reason behind encashing this pension fund?

The answer? He plans to use the funds to buy a commercial property.

We pointed out that he could have used the SIPP to buy commercial property. This also had not been explained to him.

Luckily, there is a 30 day cooling off period and we may well be able to help the client unwind the situation. To give him advice. Which he had been trying to avoid paying for. Advice that may well save him a £40,000 tax bill.

Aside from the importance of taking advice, this episode raises other questions. The recent FCA paper makes it clear that providers need to ask certain questions of people planning to cash in their pensions, such as ‘What do you plan to do with the money’. This particular gatekeeper failed.

The bank needs to ask for source of funds. The person putting together the property deal. Why didn’t anyone think to say something? The accountant did her bit, spotted the potential problem and deserves a medal. But it’s not her job. Everyone else, from George Osborne to the media to the industry, all have failed this particular individual.

This will not be the only case of its kind, I have no doubt. Interestingly, when a client seeks financial compensation and appoints a lawyer, who will the lawyer seek to sue? Major Provider? Bank? Media?

Certainly won’t be George Osborne (although that is one court case I would LOVE to see!).