What happens if you use the new pension freedoms to withdraw all your savings from your pot and you then spend the lot? Can you then settle down with your memories of your happy splurge to a later life living on benefits? For those with relatively small pots, this might have been looking like a pretty good idea.
Why take say £1,000 a year from a £16,000 pot when you could take out the lot, go on a luxury cruise, and get then that £1,000 a year made up from housing benefit or some such?
The good news (for taxpayers) if not for the profligate is that this isn't going to be possible. The last thing the government wants is pension freedom for individuals turning into a spiralling welfare liability for the state.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So they have released a firm fact sheet on the matter. You can read the fact sheet here, but the key point is that after retirement age, you are "expected to use your pensions to help support yourself."
If you haven't used it to buy an annuity, an "amount of notional income" will be assumed from your pension and that will be taken into account when your benefits are being calculated.
If you take more than that as income, the higher of the two numbers will be used when calculating income-related benefits. If you take significantly more and spend it in such a way that you are considered "to have deliberately deprived yourself of that money in order to secure your entitlement to benefits*", you will be treated as though you still have the money and your benefits will be calculated accordingly.
So that would seem to be that: spend your pension irresponsibly and you could end up having a deeply miserable old age the government isn't planning to let the welfare state bail you out. However there are as ever a few loopholes knocking around here.
The first is over capital and income. As far as I can see from the factsheet, "if you take a cash lump sum" this will be taken into account as capital. The rules on capital are more generous than those on income for benefits purposes, so this could allow some to take more than the notional amount mentioned above annually and still have benefits assessed on the notional amount.
It is also worth noting that the law on deprivation applies only in the case of deliberate deprivation. Those who don't understand the rules presumably can't be guilty of deliberate deprivation. That rather suggests a higher welfare bill post pensions freedom that the government is yet ready to permit.
* This rule isn't new but its application to pensions law has been clarified by the new fact sheet.
-
Four AI ETFs to buyIs now a good time to buy AI ETFs? We examine four AI ETFs that investors might want to add to their portfolio
-
Chase boosts easy-access interest rate - savers could earn 4.75%Chase is offering a boosted interest rate which is fixed for six months, on top of the standard variable rate
-
Our pension system, little-changed since Roman times, needs updatingOpinion The Romans introduced pensions, and we still have a similar system now. But there is one vital difference between Roman times and now that means the system needs updating, says Merryn Somerset Webb.
-
We’re doing well on pensions – but we still need to do betterOpinion Pensions auto-enrolment has vastly increased the number of people in the UK with retirement savings. But we’re still not engaged enough, says Merryn Somerset Webb.
-
Older people may own their own home, but the young have better pensionsOpinion UK house prices mean owning a home remains a pipe dream for many young people, but they should have a comfortable retirement, says Merryn Somerset Webb.
-
How to avoid a miserable retirementOpinion The trouble with the UK’s private pension system, says Merryn Somerset Webb, is that it leaves most of us at the mercy of the markets. And the outlook for the markets is miserable.
-
Young investors could bet on NFTs over traditional investmentsOpinion The first batch of child trust funds and Junior Isas are maturing. But young investors could be tempted to bet their proceeds on digital baubles such as NFTs rather than rolling their money over into traditional investments
-
Negative interest rates and the end of free bank accountsOpinion Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK banking system slightly less awful, says Merryn Somerset Webb.
-
Pandemics, politicians and gold-plated pensionsAdvice As more and more people lose their jobs to the pandemic and the lockdowns imposed to deal with it, there’s one bunch of people who won’t have to worry about their future: politicians, with their generous defined-benefits pensions.
-
How the stamp duty holiday is pushing up house pricesOpinion Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb.
