Free up ‘pointless pensions’ and boost growth
The Government could raise billions in the short term and fire up the economy if millions of “pointless pensions” could be encashed, according to pensions expert Angela South.
Ms South, managing director of Magna Wealth Management, said there were billions of pounds sitting in pensions that are too small to give individuals a decent monthly income in retirement.
“These ‘pointless pensions’, as I call them, contain sums that will never fulfil the reason behind saving in a pension – to provide an income in retirement.
“Pension pots of up to, say, £50,000 are too small to make any significant difference to someone’s standard of living, and many people would be better off with the money contained in them now,” she said.
For example, a £50,000 pension pot would purchase an annuity giving £133 a month, after taking the 25 per cent pension commencement lump sum of £12,500.
She is proposing that pension pots of up to £50,000 could be encashed with the Government taking an immediate tax charge of 25 per cent – which is an average of the amount of tax relief given on premiums.
“There are literally millions of small pension pots that have been built up over a number of years in a job, but many are too small to really matter,” she said.
“Annuities are going through the floor, so the income from small pensions pots is very poor.
“By paying 25 per cent tax back to the Government – an average of the tax enhancement to the pensions given when people were contributing – the Government isn’t losing.
“Individuals can encash pension pots under £18,000 under what is called ‘triviality’ but many people have one, two or three pensions that may not amount to much individually, but add up to a sum towards £50,000.
“If people were able to access these ‘pointless pensions’ now, the Government would get an immediate boost to the Treasury, but more to the point, the money freed up would be used for a host of different reasons.
“Some people might use it to clear their mortgage, or other debts such as loans and credit cards, but others might spend the available cash on domestic goods or cars, giving an immediate lift to the high street and the retail trade in general.
“This is a very simple and cost-effective way of boosting growth without materially affecting the Government’s austerity measures – in fact it helps lift the economy upwards while the cuts are taking expenditure in the other direction, thus exaggerating the chances of economic recovery in a much shorter timescale,” she pointed out.
Pension changes won’t just hit the mega rich – Magna Wealth Management
Pension savers need to act fast to check whether they will be hit by a major tax change which comes into effect on April 6 this year.
Angela South, managing director of Magna Wealth Management in Temple Grafton, Warwickshire, said that thousands of people were unaware of the impact of the new rules and did not realise that they might be affected.
The changes will see the amount that can be saved into a pension with tax relief over an entire lifetime cut from £1.8 million to £1.5 million.
“£1.8 million, or for that matter, £1.5 million, sounds like a fortune but many long term members of final salary schemes – such as senior teachers, doctors and other professionals – may be affected,” she said.
So too could company owners and directors planning their exit strategies for a well funded retirement. And she pointed out that the reduction from £1.8 million to £1.5 million was a two edged sword.
“In the first place, not only does it limit by £300,000 the amount you can put into your pension, it also dramatically affects the amount of tax free cash you can take.
“You are currently allowed to take 25 per cent of your pension fund as a tax free lump sum when you choose to after the age of 55 – so the reduction in the allowance cuts the amount of tax free cash you can take by £75,000.
“Secondly, there could be an additional effective tax charge of 55 per cent on the surplus above £1.5 million,” she said.
“You can escape this tax by opting for fixed protection and this permits you to keep a lifetime allowance of £1.8 million – but you must stop paying into your pension fund at that point.”
The rules are complex and deciding on whether to go for fixed protection is not easy or straightforward.
“We need to consider when you want to retire, the alternative benefits your employer may offer, what future governments might do. In some cases, one option might be to take some of your pension now in order to be able to invest more after April 6.
“But every case is different, not only because of different pension products but also because one person’s retirement plans or options may be very different from another’s and we have to factor all the elements into the equation in order to lay out all of the options before our clients,” said Mrs South.
“There are other elements that need to be considered such as whether to opt for enhanced to fixed protection which, in a limited number of cases, will allow you to increase the amount of tax free cash available to you.
“Switching to fixed protection, however, would mean you lose the unlimited growth potential of your fund which will be taxed if it exceeds £1.8 million in retirement.”
Another suggestion is that those aged over 55 could benefit by moving £1.8 million into income drawdown before April 6, 2012.
Mrs South said: “This would provide you with a high tax free cash amount and allow you to continue with unlimited protection.
“But, and this is a big but, it means moving large sums into a situation that could attract a 55 per cent tax charge when you die.
“As you can see, three dimensional chess is relatively simple in comparison, and you need to take expert advice from an independent financial adviser who is experienced in all matters relating to pensions, benefits, inheritance tax and estate planning,” she stressed.
Magna Wealth Management is a trading name of Expat Pension Providers Ltd which was established to provide UK expats living overseas with the same quality of Financial Services Authority regulated advice that they would receive if they still lived in the UK.
The business was established by Angela South who has over 30 years experience on both the product and client side, having worked for companies such as Scottish Widows and Canada Life, before setting up her own independent financial advice service in 2008.
Magna Wealth Management now advises a wide range of UK-based clients in the business, professional and sporting world from its base in Temple Grafton, near Alcester, in Warwickshire.