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Example Case Study 3 - Moving Abroad

The third in our example case study series involves Dorothy and her husband who needed to raise as much capital as possible to move abroad and start a new life together.

They already had their contacts abroad looking into suitable rental accommodation and were already investigating work opportunities themselves. As the couple wanted to move abroad first, and then look for work, they calculated that they would need about £1,200 a month to cover living expenses.

At the time, Dorothy had three paid up personal pensions which she wanted to consider releasing a cash lump sum from. As Dorothy saw it, unlocking her pension funds could help them achieve their objectives and move abroad as they wanted.

Having transferred the three separate pensions into one pension arrangement, going through with pension release process subsequently unlocked a cash sum of £5,078. This proved enough for Dorothy and her husband to use to move abroad and cover all living expenses for a few months while they both looked for work.

It was a high risk strategy from Dorothy’s point of view because if they didn’t secure work within 4 months then they will have run out of money. However, it was a risk she and her husband was prepared to take. Had her circumstances been a little different it may not have been suitable for her to carry on with pension release.

At Grove Financial Planning Limited each case is looked at individually to make sure the right advice is given to each person on a case by case basis.

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Example Case Study 2 - Clearing Debts & Emergency Fund

Continuing our example case study series, we will look at an example of how funds acquired through pension release can be used to clear existing debts and plan for those unforeseeable emergencies that can and do crop up.

When Tom first looked into pension unlocking, he was bankrupt, having had his catering business fail due to circumstances out of his control, and still left with an outstanding loan that hadn’t been covered in the bankruptcy. Between his wife and himself, Tom calculated that the couple’s total debts amounted to £9,400. Their wish was to pay off the debts then acquire more funds to put towards an emergency fund.

Tom initially looked into pension release as he thought that the three personal pension plans were too insignificant to provide a sufficient income in retirement, so he figured he could “cash up” and use the funds to assist in getting the couple’s life back on track. Tom considered the sacrifice of the pension funds to be a small inconvenience compared to the stress that the couple were going through at the time as they were unable to live within their means.

Grove Financial Planning’s advice in this situation was to transfer his three pensions into one plan, and as a result, a total cash amount of £13,365 was released. As income was not required, the remaining balance of the pension fund would be left invested to a later date.

The released funds provided Tom with enough money to clear the £9,400 debts he and his wife had accrued and still have money left over for their planned emergency fund.

Had Tom’s circumstances been a little different pension release may not have been suitable. For example, had he not been a bankrupt he may have been able to restructure his debts into one larger amount over a longer period, this would have achieved reducing the monthly cost of his debts, which in turn meant he could live within his means and therefore not required to unlock his pension. Or had his pensions been company pension schemes the loss of what he would have otherwise got at retirement might have been too much to justify pension unlocking.

This is why it is so important to seek professional advice from a company like Grove Financial Planning Limited: we can make sure your circumstances are looked at individually and any recommendation is suitable for you and your specific situation.

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Example Case Study 1: Deposit to buy a house.

Our first case study involves an enquiry from Helen who needed money urgently and was considering Pension Release/Pension Unlocking from her personal pension plan.

She explained that she and her husband needed to raise as much capital as possible for a deposit on a house. They had a £10,000 payout from a bank charges claim but needed to top this up to give them a sufficient amount to put down as a deposit. Pension Release, otherwise known as Pension Unlocking, seemed to offer the solution for them.

For the couple it was extremely important to get back on the mortgage ladder and own their own home after a period of living in rented accommodation. Helen explained that the couple had invested all previous savings in a business which unfortunately failed and due to other circumstances, were not in a position to borrow money for the deposit.

Taking cash from the pension now in the form of Pension Unlocking or Pension Release, although maybe not the ideal solution, was for them the only real alternative to enable them to meet their objective.

Helen and her husband fully understood that by taking benefits from Helen’s pension early the pension income in retirement would almost certainly be reduced. However, the position they found themselves in meant their retirement fund, for the time being, had become very much a secondary concern.

Once they had sorted out the mortgage and purchased a house, they could then focus their attention to the matter of planning for their retirement. At the time, Helen was aged 51 and her husband was only 40, so they still had enough time left between them to accumulate an acceptable retirement fund.

In this instance Pension Unlocking or Pension Release was appropriate for their circumstances. Obviously, had the circumstances been different – had they been older and had less time to rebuild their retirement funds, or had the amount needed led to too large reduction in pension income for example – then this solution would not have been for them.

At Grove Financial Planning, we look at each case on an individual basis and offer the most appropriate advice for each situation.

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DB Pensions Deficit Rises to £20bn

Recent news has revealed that approximately £20 billion has been wiped off the UK’s defined benefit pension schemes over the past two days.

According to industry sources, two increases in deficits of £7 billion and £13 billion occurred over two subsequent days.

Initially, the blame was put on a 6% fall in the equity markets as traders responded to the demise of the Lehman Brothers bank but that might be simplifying the issue somewhat.

There have been a number of reasons over recent years adding to the problems suffered by company defined benefit pension schemes, not least of which is the massive losses recently suffered on world wide stock markets, but in particular the problems here in the UK.

This will be because a significant part of any investment in a UK defined benefit scheme will be in the UK stock market; however, this is not the only reason our company schemes, once the envy of the world, are looking broke.

Ever since the demise of Robert Maxwell and the subsequent discovery of the problems with the Mirror Group pension scheme, it became clear that the rules surrounding these types of pension needed to change and become a lot “tighter”.

This resulted in significant increases needed in the funding of company defined benefit pensions because they were now required to hold more money to cover the potential liabilities i.e. they had to make sure there was enough money to cover the liabilities of the members of the pension scheme.

In very simplified terms, it used to be the case that all you needed in the way of funds in a defined benefit scheme was enough to pay for those members who were retired, with a little bit more for those who were just about to retire. However, the contributions being paid by the younger members were enough to cover this on a year on year basis.

Now, quite rightly, you have to make sure there are sufficient funds invested to allow for an ageing membership of the scheme, with greater and greater numbers receiving pensions and proportionally less people paying into it. You have to allow for people transferring away from the scheme and a number of other complicated factors that require basically more money to be held by the pension fund.

This all came at a time when the recent chancellor Gordon Brown, wiped off several billion pounds a year from our pension funds in new tax charges, to line the coffers of the Treasury – very bad timing indeed!

With all these changes there has also come far greater responsibility, and indeed liability, for the trustees of these schemes to make sure everything runs as it should and the members of the pension fund are looked after appropriately.

This is why so many of our defined benefit pension schemes need to look again at what they have and decide how best to move forward – they must do this for the benefit of their members but also because THEY now have personal liabilities towards the work they carry out, and this is also a collective responsibility. It is no longer possible to say another member of the trustee team has responsibility for say investment strategy and it therefore “wasn’t my fault”, you all have responsibility together so be careful!

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Is Nick Clegg Out of Touch with with Pensions Today?

It seems that Nick Clegg, the Liberal Democrat leader, has greatly under-estimated the level of the basic state pension.

Whilst the errors recently made by Nick Clegg seem incredible, unfortunately no one these days would be surprised at this level of ineptitude from a politician.

Mr Clegg, the leader of the Liberal Democrats, when asked in an interview for ITV West-Country how much the state pension was he said “I think it’s about £30 quid now, isn’t it?”

The questioner Wally Cotgrave, a retired blacksmith from Devon said he was “unimpressed”. The answer should have been £90.70 a week for a single person and £145.45 for a couple, with more if you claim tax credits.

What I find a bit rich are the comments then made by Mike O’Brien, the New Labour Pensions Minister, who accused Mr Clegg of “living in a remote world – an ivory tower”.

Mr O’Brien would seem to be saying that Mr Clegg didn’t know what he was talking about and by association was inferring that he didn’t take the subject seriously enough or indeed think it was important enough to know something as simple as the amount of basic state pension people are entitled to.

What I think Mr O’Brien is trying to say is that his party is the one that takes pensioners situations seriously and Mr Clegg’s isn’t.

After all, we are an ageing population and it should be getting more and more important that our politicians start to take notice of this; pensioners are voters too!

With this in mind I would like to point out  that up to the beginning of this year, New labour have had no less than 13 parings of ministers to look after the serious business of pensions, since they got into power in 1997.

It started in May 1997 with the paring of Harriet Harman and Frank Field. It changed again in July 1998, January 1999, July 1999, May 2001, May 2002, June 2003, September 2004, May 2005, November 2005, May 2006, June 2007 and a change in January this year to the paring of Mike O’Brien and James Purnell.

Here are two people who are pushing through a new regime of Personal Accounts, where the affect of means tested benefits could mean that if you save £1 into one of these accounts, you could very easily get less than £1 back.

So I am of the opinion that although it is a disgrace that the leader of the liberal party doesn’t know what he’s taking about, it does not seem New Labour are taking this issue seriously either.

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25% of Pensioners using Pension Lump Sum to pay off Debt

Research carried out recently by Scottish Widows shows that a significant number of retirees use pension lump sum payments to clear debts.

An estimated quarter of all retired people are using part of their pension lump sum to repay debt and a further 17% admitting they are using their pension lump sums that they receive when they stop working to pay off their mortgage.

Ian Naismith, head of their market development team said “it’s a shame that some people need to spend their hard earned savings on paying off a mortgage or clearing debts. Retirement should be about enjoying life”.

Whilst his comments are true it seems to miss the point that if this is the process needed in order to clear debts, it will help someone to actually retire and enjoy their life if they do use their lump sum to clear debts.

A pension is a form of saving for old age but we now live within a world that is not as cut and dried as it was. We no longer aspire to working full time up to a specific date and then the next day being fully retired. More and more people will continue working, maybe on a part time basis, and look to stagger their retirement.

We are a society that has recently been built on debt; you leave full time education with debts and sadly, go into retirement with debt too. Because of this we have to start looking at pension arrangements in a different way. Maybe rather than feel sad or discourage the use of pensions to clear debts, we need to start thinking about them in a more flexible way.

If we started to think in a more progressive and flexible manner we might be more encouraged to save into a pension. We currently have the option to access money from our pension schemes from age 50, although sadly this is going to increase to age 55 in 2010. If we look at our pensions in a sensible way and use them more creatively, then maybe releasing some funds in stages can be a very useful option in some circumstances. It seems crazy to me that we are moving away from this flexibility by increasing the age you can do it. Do the government think we are not capable or mature enough to make our own decisions, or if we get professional help they are all going to stitch us up?

I’m not saying that we should all start looking at releasing some of the money in our pensions early but what I am saying is that we need to change our opinion about how pensions work and their purpose.

If we can start to look at them in a more flexible way, being creative and giving options about how and when we start to access them rather than being completely rigid and singled minded, then we may be able to start changing the culture of saving and encourage more and more younger people to start saving towards retirement.

Who wants to even think about saving long term for a fixed date a lifetime away, however, if you could think about a tax efficient savings plan that gave you flexible access from before you retire, maybe, just maybe, we could stop the rot and bad pres pensions get; and the first thing we need to do is change the attitude of the institutions such as Scottish Widows and bring their marketing into the modern world.

Just talking about saving enough “to make their retirement dreams and aspirations come true” is not going to encourage anyone – do they have an image of a woman in an apron next to an AGA? Please save me from this!

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Is it Pension Release or Pension Unlocking?

We receive many enquiries regarding the terminology used by financial advisers and in news articles. It can be confusing when one service  - that of pension release - is known by a variety of names.

We have put together this short guide to help the uninitiated understand the different monikers for pension release services.

The main terms that are used regularly to describe the release of pension proceeds prior to retirement age include Pension Unlocking, Pension Surrender, Cashing Pensions and Selling Pensions

Pension Unlocking - this comes from the idea that your pension fund is “locked” until you retire. So naturally, to unlock your pension would mean to make the funds available prior to retirement.

Pension Surrender - this is a peculiar term as surrendering is usually used in the context of not having a choice - you always have a choice in these matters and it it worth discussing your situation with an approved financial adviser before going through with the pension release process.

Selling Pensions - although it has entered common parlance, strictly speaking you are not able to sell your pension. Still, the term is often used when someone wants to take a lump sum of cash from their pension fund before retirement.

Cashing Pensions - Cashing pensions has an obvious root - pension holder obtain cash lump sums from their pension funds and so are considered to have “cashed in” their pension as opposed to receiving payments on retirement.

So as you can see, the terms that also get used to describe pension release have a variety of sources and even one that is a totally inaccurate turn of phrase for the process.

If you are unsure of any terminology used in the pension release process, contact us and we will be happy to talk you through the service.

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Sipps Pension Holders May Face Tax Bills

People with Self-Invested Personal Pension schemes, or Sipps, may face hefty tax bills due to a loophole in the way that pension statements are regulated, according to some pension providers.

According to experts, the Financial Services Authority’s rules for scrutinising partially reconciled Sipp statements are not as clear cut as they are for “fully reconciled” ones.

This has produced something of a grey area regarding rules around partially reconciled Sipp statements and industry voices are saying this is ripe for misinterpretation.

Potentially, the rules could be interpreted in quite a wide variety of ways and it is suspected that different providers will interpret them in a way that suits them and saves them the most money.

The predicted effects of this are that the providers will have inadequate controls in place to ensure the Sipp is doing what it is allowed to do. These lack of controls and smudging of the interpretation of rules could leave Sipp holders vulnerable to unexpected tax hikes due to inexperienced investment managers investing in assets that are not Sipp-permissible. If details like this emerge lateer on, it could lead to a big tax bill either the customer or the provider.

Some sources state that the very public voicing of such concerns is purely scaremongering with very few Sipp clients - those who hold taxable property in their Sipp - being affected by the loophole.

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Happy Birthday, State Pension - 100 Years Old this month

The 100th anniversary of the start of the state pension system is celebrated this month. The Old Age Pensions Act was passed in August 1908 and the first payments to pension fund holders were made on 1 January 1909.

Over half a million people - comprising of the old and very poor of society at that time - queued up at their local post offices to collect the first state pension payments available in the UK but when the details of the system are looked at, it seems hard to draw a line between the original system and that in place today by anything other than name.

Initially, the maximum weekly payment of five shillings (25p) for a single person was considered a meagre sum - it’s modern day equivalent would have been around £20 - and to get even that the person would have to be at least 70 years old. This might seem a only a slight difference to todays pensionable age but at the turn of the century, without the improved living conditions of today, only 5% of Britain’s population were older than that.

To add to difficulty in receiving pension benefits, the new pension system was means-tested to boot. A person would only be eligible for pension payments if their income was less than 12 shillings per week, and having too much furniture in their home could see their payment reduced.

Convicted criminals, drunks, the voluntarily unemployed and individuals of “bad character” might have their pension payments refused outright.

The eligibility of claimants was inspected by pensions officers - civil servants who would visit potential and current claimants in their homes to make assessments of the person’s circumstances. These reports would then be passed on to a separate pensions committee for review.

The 1908 Old Age Pensions Act was bought in due to neccessity. As living conditions improved, people were starting to live beyond the point where they were physically capable of working. While the Friendly Societies of the time were geared towards supporting prosperous workers and workhouses were built to house and employ the destitute, there was no support for the emerging generation of elderly, unemployable people. The Victorians called the phenomenon retirement that this generation experienced “retirement”.

It took 30 years and the election of Liberal government to see a system put in place that would support the unemployed elderly.

Over the years the pension system has seen many changes - in 1928 the pension age reduced to 65, in 1948 national insurance contributions were taken into account and the pension age for women was reduced to 60 - and with the pensionable age set to reach 68 by 2048, the pension system in this country will look a distant relation to the original 1908 Old Age Pensions Act.

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Unlocking Serps for Sipps

The government announced recently a change to the way in which pension money can be unlocked. It is believed that there may be up to 50 billion pounds in these pensions that will be accessible by the policy holders when the new legislation comes into effect in October.

The new unlocking rule regards pensions formerly known as Serps where those opting out of the state pension system were allowed to have a proportion of their national insurance contributions paid into personal pension schemes.

This option, first introduced 20 years ago, will affect many people who moved final salary schemes away from employers, perferring to invest their funds life assurance policies.

“Until this rule change came along, this was not possible but, from October, it will be. Transferring out of final-salary pensions is not for everybody but, if you do decide to switch, in a few months you will have the freedom to do so into a Sipp.”

The department of work and pensions has decreed that as from October pension holders will have the choice of moving their funds ( unlocking their pensions ) into Sipps, so allowing a greater freedon of investment.

As with releasing funds from a personal or occupational through the traditional method of pension release - taking a tax free cash sum and deferring the remaining payments - this pension unlocking will not suit all investors as many life insurers have well managed funds with varied portfolios which can be cheaper to manage than a Sipp. Certainly though the massiely increased flexibility of Sipps will attract many investors to unlock their pensions. One should be aware also of unforseen additional costs involved with transfers before committing to cashing in their Serps for Sipps.

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