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Cashing in a Pension – Can I Cash in my Pension Early?

“Can I cash in my pension early?” is a question we get asked often. The answer will depend on your individual situation. Please fill in the enquiry form on the top-right of this page to book a free phone call to discuss your options.

In this article we look at some of the options available when you want to raise money from your pension before you retire. Many schemes have sprung up recently, offering solutions like pension release, pension loans, pension transfer and “pension fund advance”. While you should always consult a qualified professional advisor, we’ll give you some more information to help you make your decision about whether one of these options is right for you. Please note that we do not offer financial advice. The market is changing frequently, with new schemes appearing almost every week, so please consult a professional financial adviser if you are unsure about what is best for you.

Why Cash in Your Pension?

Often people who want to raise cash from their pension are in a difficult situation. They may be seeking to stave off debt collectors, or even bankruptcy, and have no alternative source of funding. This is especially true at the moment while banks seem to continue to be resistant to lending and there is limited liquidity in the marketplace.

So the need for funds is often urgent and pressing! But don’t let that urgency prevent you from gathering advice and information to make the best decision. “Buyer beware” is a caution that can easily be applied to the intricate world of pensions. This applies even more so when you are considering the need to access cash from your pension early (before retirement). Over recent months there has been an explosion in the number of available schemes in the marketplace. To research them all thoroughly is a challenge and here we offer a simple insight and overview that may help you.

Pension Loans

The term “pension loan” is actually inaccurate, because in fact no loan can be taken directly from a pension for personal use. This method of raising cash gives an individual with a pension fund of over £10,000 the opportunity to apply for a loan, generally from 25% to 40% of the value of the pension fund (or a combination of several pension funds).

The loan that is applied for comes with a list of terms and conditions which form the long term structure of the arrangement. Initial fees for set up and Annual fees for the management will reduce the balance of the pension fund. The pension may need to be topped up in the future if the funds are exhausted and fees remain outstanding.

If the total outstanding loan balance is not repaid before retirement then the pension in payment is used to continue to service the loan. This arrangement is often supported by a tax advisor’s opinion and a set of  written documentation (often in the form of “Frequently Asked Questions” or FAQs) to give you the information you need to make an informed decision.

Pension Reciprocation

Important Update: “pension reciprocation” schemes were declared illegal by the UK High Court in December 2011 (though the case may be appealed).

Two people agree to temporarily swap their pensions. Each in turn generates a loan for the other with certain terms and conditions attached. This structure gives an individual with a fund of over £30,000 the opportunity to apply for a loan of up to 50% of the value of the pension fund.

The borrowing triggers interest payments that are then payable into the lending pension scheme. Initial fees for set up and Annual Fees for the management will reduce the balance of the pension fund. The pension may need to be topped up in the future if the funds are exhausted and fees remain outstanding.

The total outstanding loan balance is expected to be repaid on or before retirement.

European Stock Market

It appears that some “pension release” providers are offering the opportunity to purchase stock in a European stock market listed company.

This structure gives an individual with a current pension fund of  £30,000+ the opportunity to apply for a loan of up to 50% of the value of the pension fund. Shares are purchased from your pension fund via a market maker who is trading the stock.

It appears that some sort of rebate is then offered by the listed company. The details of this rebate mechanism are beyond the scope of our current knowledge and understanding. Whilst these structures may be financially and legally sound, we encourage greater diligence in determining the legal and compliance matters that arise from such a transaction. Buyer beware!

Exotic Offshore Opportunities

Offers of high investment returns from exotic overseas land opportunities have been commonly available throughout history. Stories of big losses and “boiler rooms” selling too-good-to-be-true deals regularly appear in the media.

It would appear that the Pensions Loan Market has not escaped such tactics and examples of the offers being made include Caribbean land deals, Golf courses in France, and Australian land in the Outback! This structure gives an individual with a fund of £15,000+ the opportunity to apply for a loan of up to 70% of the value of their pension fund.

Once again, it is possible that some of these structures may be financially and legally sound; however, we encourage even greater diligence in determining the legal and compliance matters that arise from such a transaction. Check and double-check everything with a qualified advisor! Be aware that schemes that operate outside the UK are not subject to UK legislation if anything goes wrong.

To avoid these problems, we only deal with companies that are based in the UK.

Conclusion – Can I cash in my pension early?

You may be struggling to make ends meet and looking for the loan-of-last resort to help you in these difficult economic times. You may want to just get it sorted out as quickly as possible. But we encourage you to proceed with caution and consider the potential “What if’s” around your retirement as well as the various legal and compliance issues connected to raising cash from your pension. We hope you found this article a useful simple introduction as you begin to responsibly research into what is a highly complex area.

Be aware that often advice in the area of loans against pensions is not regulated by the FSA (Financial Services Authority) and therefore is outside of government regulation. This does not however prevent you from seeking the opinion of someone with relevant qualifications.

If you’d like to talk through your options, please use the enquiry form at the top-right of this page to book a free and confidential call with an expert.

Note: at no point does this summary article substitute neither is it intended to substitute for advice from a suitably qualified individual. Pensions advisors with a G60 or equivalent qualification can be deemed suitable for this purpose.

Bad Credit Loans – scam warning

The OFT is cracking down on dodgy loan companies who are targetting people with bad credit records, offering “bad credit loans” and asking for upfront fees. Lovemoney.com describes the problem in a recent article –

“Another problem with the market for alternative credit is rogue traders who contact customers offering cheap credit in return for upfront fees.

These dodgy lenders usually contact their victims by telephone or via text messages, promising to provide attractive loans on payment of an upfront finder’s fee. Alas, many of these loan offers never materialise. Instead, dishonest credit brokers pocket the initial fees and then ignore customer complaints.

According to consumer watchdog the Office of Fair Trading (OFT), 270,000 UK consumers have paid upfront fees to loan finders in the past 12 months alone. Typically, these fees are between £50 and £70, but some are as high as £300.

Sadly, many of these consumers never receive a loan offer. In some cases, victims were badgered into handing over their bank details, only to find later that money had been taken from their accounts without permission!”

But the OFT has said it intends to crack down on companies charging fees in advance for bad-credit loans that they never provide. Such companies will be legally required to refund the fees if they do not arrange a loan within 6 months.

Debt management companies will also be targetted to clean up their act soon –

“The OFT is introducing new rules aimed at preventing debt-management companies from abusing vulnerable consumers.

Later this month, the OFT will bring in rules to stop debt-management firms from making misleading advertising claims; charging high, upfront fees; giving inferior advice; or dishonestly posing as charities.”

Useful contacts for free, impartial advice

www.nationaldebtline.co.uk

www.cccs.co.uk

Pensioners debts over £25,000

Equity release specialists Key Retirement recently published a press release with details of the results they compiled from customers applying for Equity Release. They found that on average, pensioners are dealing with over £25,000 of debt from mortgages, credit cards, and unsecured loans!

“The average pensioner with debt taking out an equity release plan on the value of their home has debts totalling £25,418…

And the average doesn’t tell the whole story – maximum credit card debts are as high as £90,000 with some pensioners clearing £250,000 unsecured loans and others struggling with £340,000 mortgages.

Key Retirement Solutions believes the credit crunch has driven pensioners to turn to credit cards to fund living costs when they’ve been unable to borrow in other ways and warns that the aftershock of the endowment mis-selling issue is another major factor.

Its analysis of more than 4,400 customers in 2010 shows one in three had debts run up from credit cards, loans or mortgages with many struggling with multiple debts.

Figures for the first quarter of 2011 show 31% of customers used some or all of the cash they raised from equity release to clear their debts compared with 23% for the last three months of 2010.”

Equity release can be one solution to clearing debts. Another possibility is pension release. If you’d like to find out if pension release could be a useful option for you, fill in the form at the top-right of this page, and get a free informal advice call.

Gambling on the lottery to pay your pension?

The National Association of Pension Funds (NAPF) published results from a recent survey today, some of which makes for scary reading!

“Around three million people who are not retired are relying on a lottery win to pay for their retirement, and a similar number are counting on an inheritance windfall, a new survey reveals today.

The research by YouGov for NAPF asked people who have not yet retired to list the different ways they are planning on funding their retirement.

Nearly half (49%) said they plan to do so through a workplace or private pension. But a striking 8% – or just over three million people by NAPF estimates – said they are relying on a lottery win to fund their older age, while a similar number (9%) are banking on an inheritance windfall.”

We mentioned previously that the UK pensions gap is growing, and that innovative solutions (like options for early pension release) are needed to address the problem. The NAPF’s survey highlights how urgently new thinking is needed to address the problem of funding the retirement of our aging population.

Google launches Financial Comparison Site

Google announced last week the launch of their new price comparison website for financial products – Google Advisor. Initially it only works in the US, but as with many of their services, if it is successful we can expect it to be rolled out to the UK in the near future.

At the moment they are focussing on the simpler, high-volume financial products like mortgages, mortgage refinancing, savings and checking accounts (Current Accounts).  More complicated products like pensions are not easy for online comparison websites to feature, as they usually require a personal interaction with a qualified financial advisor. But Google is famous for its online innovation, so watch this space!

In their announcement Google described the benefits of their new site –

“With Google Advisor, you enter information about what you’re looking for in a mortgage, credit card, CD, or checking and savings account. We show you a list of the offers that match your criteria, along with rates and contact information. Google Advisor is designed especially to help you make these difficult financial decisions easily, with:

Speed: As you change your criteria, the results update instantly. You’ll still have a list of all your options in one place, so you can quickly compare different offers.

Trust: By setting your own search criteria, you’re able to see only those offers and rates that apply to you, which means you can compare applicable offers without even contacting a provider first.

Control: You only need to provide the minimum amount of information we need to show you offers that are right for you. You have full control over what you want to share, and which providers you choose to talk to—and you don’t have to submit any personal information until you’ve decided you’re ready to move forward.”

Will UK online comparison sites like CompareTheMarket be affected? We will have to wait and see, “Simples!”

Early Pension Release options could help the pensions gap?

It is fairly well known that in the UK, as in many western countries, our ageing population (the baby-boomers are getting older) will lead to problems with how the country can support the increased proportion of pensioners in the future – the “Pensions Gap”.

Lots of people are suggesting solutions, some more radical than others. For example, in a recent report for the CII (Chartered Insurance Institute) titled “An age-old problem: developing solutions for funding retirement”, Ros Altmann suggests that pensions need an image makeover –

“The word ‘pension’ often has negative connotations nowadays. It conjures up the image of being old, which many people resist…we should abolish the word ‘pension’ for anything other than what the state pays people in their old age.”

As one solution she suggests that the Government could create a £1 million monthly lottery for people who put aside money every month to save for their retirement.

Commenting on this suggestion, Ed Bowsher at Lovemoney.com has some other ideas. One option is to allow people to release pension funds at an earlier age. To “Unlock the Box” as he puts it –

“When you save into a pension, you can’t get access to your money until you’re 55 at the earliest. That’s a good thing in some ways as it means you can’t fritter your pension away on an expensive holiday when you’re 40. The ‘lock box’ forces you to be prudent with your retirement savings.

Trouble is, I suspect the lock box puts lots of people off from saving for their retirement at all.

I think we need to allow savers to access their pension pots at a younger age. Or at least a portion of their pots anyway.”

It will be interesting to watch what other ideas for reform start to surface, as the ticking of the “Pensions Time-Bomb” gets louder!

Tax-Free Cash Lump Sum – should you take it?

When your pension matures, you have the option to release a lump sum in cash from your pension, up to 25% tax-free. While this may seem like great news at first glance, there are pros and cons to consider when deciding whether to take this lump sum straight away. Pension advisors Hargreave Lansdown have a good article, entitled “Tax-Free Cash: Should you take it?”

In the article they discuss some of the less-than-obvious reasons why you may want to pause for thought before deciding to release your cash lump-sum :-

“When you come to draw on your pension you can take up to 25% of its value as a tax-free cash lump sum, instead of converting that portion into a taxable income. Somewhat unsurprisingly, many people do just that, and with good cause. However, there are occasions when taking the tax-free cash might not be the ‘no-brainer’ it appears to be.”

The article also discusses the option of putting your tax-free lump-sum into an ISA, with the potential to generate better returns with the money :-

“Almost half of people saved some of their tax-free lump sum into an ISA according to a survey we conducted last year. The reason for doing so is clear: the lump sum may be tax-free but unless you move it into a tax shelter like an ISA, any further income or gains you obtain are potentially subject to tax. The ISA allowance is now £10,680 per person, so a couple can put in a joint total of £21,360 this tax year. Over a few tax years you can see how a significant portion if not all of your lump sum could be squirreled away into ISAs and out of the clutches of the taxman. You can then use the ISA either to supplement your income or leave it to grow to draw on at a later date. Taking your lump sum and saving it in this way also gives you greater scope to adapt to changing spending needs; you may not need a capital sum at the point of retirement, but in the future you might.”

As always, think carefully and consult professional advice if appropriate, before deciding whether to release the money from your pension.

Pension Planning & Preparation

Pensions are like most things in life; ultimately the results will be influenced by your commitment to good planning and preparation.

It is important to take the pension plunge and get started as early as possible and as young as possible.

The pension planning journey is unique to all of us! Hopefully all the time and effort you put in now will help to provide for a significant number of memorable and enjoyable years later.

Good planning and preparation will help you to remove the need to even think about getting lucky by winning the pools or the lottery. Even the potential to inherit wealth is less certain these days, as the cost of living continues to rise and we all live longer.

To begin retirement planning you need to understand your financial starting point, “Where am I now?” Then it’s important to make a projection way out there in and future and predict, “My retirement plan!” In simple terms “The Gap Years” in the middle is where all your actions over the forthcoming years will determine the financial quality of your retirement.

A simple model as an overview may look like this. So, think of “where I am now!” as my present moment starting point. “The Gap Years!” are your years of planning, preparation, commitment and action. “My retirement plan!” is the cumulative effect of your work during “The Gap Years”.

“Where am I now?” > “The Gap Years!” > “My Retirement Plan!”

Retirement, “what do I want?”:

So to fill the gap with quality, get used to either asking good quality questions or finding someone who will. Great questions will take you to the heart of your pension matters.

• How much income do I want in retirement?

• What is the impact of inflation on my desired pension income?

• What is my life expectancy?

• How many years do I expect to enjoy in retirement?

• Who or what else will support me financially?

• How much do I have to save?

• Out of ten, how committed am I to my pension plans?

• What is the cost of delaying?

The value of more research.

Once you get started you will be bombarded throughout the gap years with decision points that can seriously affect the ultimate value of your pension fund.

• So do extra research prior to making any buy/sell investment decisions

• Do even more research prior to choosing or moving pension provider, or choosing pension release

• Allow your research to guide you prior to defining or redefining a retirement strategy.

Pension Performance:

Keep up-to-date with your fund’s performance a minimum of once per annum, if you want any chance of keeping to the retirement plan. Many things that you should keep in mind during a review will affect your future pension fund’s value including:

• Employee/employer contribution levels

• Contribution holidays

• Sickness and early retirement

• Taxation and

• Charges (including fees & commissions)

Review your decisions.

Make time to take responsibility for reviewing your pension planning and investment decisions.

Get started with your retirement plan before it’s too late. The cost of delay, should you choose to explore it, can be both motivational and frightening.

Missing a year of contributions at the front end is potentially the most damaging, because they are the contributions that get the compound benefits year-on-year right up to retirement.

Remove the excuses for standing back and allowing your pension and other assets to underperform.

If you do make decisions quickly and like to rely on recommendations then realise you are giving up on a lot of vital components we discussed above. In the long run, good planning and preparation will save you time and make you money.

Be empowered – do say “No!” if an investment does not look right to you.

Its good to talk and talking pension matters through or taking advice from a suitably qualified individual that is more expert in the area of pensions than you can really help.

Summary:

A lack of planning and preparation for retirement can and does result in reliance upon the state pension and having to make do with a minimum income. Stories of pensioners freezing and not being able to enjoy quality nutrition fill the front pages of our papers.

Do not rely on luck, the lottery or the pools, for those matters. Do not put your retirement planning control outside of yourself and rely on inheritance or others.

Keep pension planning to as simple a model as you possibly can. So, think of “where I am now!” as my present moment starting point. Remember “The Gap Years!” are your years of planning, preparation, commitment and action. Then, “My retirement plan!” is the cumulative effect of your work during the gap years.

New Money Advice Service website

Just a quick update to let you know that the new Money Advice Service website launched today in the UK.  If you’re looking for unbiased advice, it is a great place to start – with online advice, plus a telephone helpline. On their About Us page, they explain –

The Money Advice Service is here to help everyone manage their money better. We do this by giving clear, unbiased money advice to help people make informed choices.

We believe that the right money advice can make a difference to people’s lives. And when people take steps to manage their money better, they can live better too.

The Money Advice Service is a free, independent service. We were set up by government and are funded by a levy on the financial services industry.

Because we’re not selling anything ourselves, or for anyone else, you can trust our advice.

They offer advice on Pensions, as well as many other financial areas. On their Pensions section, they say –

It’s never too early to start saving for your retirement. We explain the different types of pensions and how to get started. If you’re nearing or in retirement find out how you can get the most from your pension fund and boost your income in retirement.

Pension Income in Retirement

People often question where their income will come from in retirement. The overall area of pensions can appear very complex and often confusing to the lay person.

Even the word “pension” can be misleading and often brings the focus of attention to only one area of a much bigger potential overall opportunity. Substituting the word “pension” for “assets” gives a much broader and clearer view to anyone thinking about how to finance their retirement years.

The next question is, “How long will I live for?” So use realistic mortality ages to give you an indication of the period you are planning for. If born in the UK then current tables predict age 77.2 for males and 81.6 for females. For a more accurate personal mortality calculation visit one of the many online providers.

Let’s explore a few potential incomes in retirement ideas here:

1. Basic Old Age Pension will be paid to an individual by the state once they reach the appropriate age. Currently the ages are 60 for women and 65 for men. A single person receives £97.65 and a married couples pension of between £156.15 & £195.30. Why wait? You can get a state pension forecast by using this link – http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/StatePensionforecast/DG_10014008

2. State Enhancements are also available depending upon National Insurance contributions made throughout a person’s lifetime.

3. Savings of any form come next

4. Property is an asset that can be accessed if you are willing to explore the possibilities. Selling a principal private residence and then renting instead can be the difference between an abundant and a financially challenging retirement.

5. Property ownership also gives the possibility of renting a room, especially if you live in an area with high rental demand (university town) and you don’t mind sharing.

6. Business Sale is often cited as a sav- all and often is the only form of planning a person has done. Whilst many people have sold for multi-millions over the years, many have also gone bust. Timing is everything with the sale of a business, and recession, bank collapses and economic uncertainty may not help.

7. Income from a job you continue to do either part time or full time. Who says you need to draw a pension and put your feet up anyway? More and more people are working way beyond the generalised state retirement ages.

8. Assets that you know you can’t take with you when you go e.g. Painting, jewelry & collections (stamp, wine, pottery) can be a source of much needed pension capital.

9. Other, as this is by no means a complete list, continue to explore all the possibilities available and presented to you.

So do simple expectation calculations, to work out whether you are well on track or need to take action:

State:

Savings:

Property:

Property Rental:

Business Sale:

Job:

Assets:

Other:

Some simple guidelines:

Every strategy is subject to change and so build periodic reviews into any plans you are making.

What works for one person will not necessarily work for you, so do personalise your planning and take responsibility for your decisions.

Many of us won’t be able to rely on Inheritance or the State to cover the costs of our twilight years, so it’s of the utmost importance to get the best possible return out of the money we set aside each month.

Do consider getting an extra perspective from a suitably qualified individual with expertise in pensions.