Stop the government before it raids your pension

The European machine is in trouble. Greece is essentially bust. Italy’s sinking further into the mire each day that passes. Spain’s in trouble, too. Even France could end up shocking us.

But you know all this. Question is, is there anything that we can do about it?

Well I’ve been thinking a little about what could happen next. And I’ve come to a firm conclusion: we need to take steps to protect our pensions. Why?

Well let’s just think about it for a moment. Eurozone leaders are scratching around, looking for ways to top up their dwindling coffers. The widely discussed Tobin tax – a tax on financial transactions – is being seriously considered as a way of tapping the banking industry for cash. But as George Osborne points out “There is not a single banker in this world that is going to pay this tax… The people who will pay this tax are pensioners”

And the Tobin tax is not the only way your pension could be raided in the years ahead. Because when governments come looking for money, it’s usually the pension funds that get tapped first. They’re the ones with the money after all. So you absolutely can’t take it for granted that your pension is safe.

Pension funds are always tempting targets

No sooner was a cure found to save Greece than the patient told the doctor where to stick it. So the markets have moved on. Today, the bond markets are giving Italy a run for its money. And saving Italy is going to stretch the EFSF to breaking point – after all nobody seems to want to pump any more money into this bottomless pit anymore.

It’s going to be very tempting for the authorities to look for a little ‘investment’ from pension funds. When the politicos are desperate for money, they have to go where the money is. And anyway, people may not notice the larceny until much later!

If you think that this doesn’t affect us, then think again. They may come after your savings.

A shocking history of theft

In 2008, Argentina was frozen out of global debt markets. Yields were heading towards 25%. And the country was long past the point of being able to pay its foreign investors. So the government decreed that private pension assets were to be transferred over to the state. Of course this wasn’t theft they said. No sir… The State will now pay the pensions as they come due. Yeah right!

Closer to home and more recently, Hungary shifted private pension assets into public hands. Now this is a corker.

In 1998, the government forced all workers (private and state) to save into a private scheme. And that made sense. Get workers to save for their own retirement rather than coming cap-in-hand to the state. But in 2010 as Hungary’s public debts spiralled out of control, the politicos gave its citizens an ultimatum. Move your private-pension fund assets to the state or lose your state pension (like here, you get a state top-up for your private fund).

That’s right, when the government needed cash, they blatantly nicked it all back. And what a ploy… this way, not only did the government get their hands on pensioner’s savings, they also ensured that any new contributions now go to government too. And now that government has control of the assets, they can use the cash to buy their own bonds. What a fix!

What about somewhere even closer to home? In Ireland, the National Pension Reserve Fund, set up at a time of budget surplus, is providing €12.5 billion towards the bail-out of the banks. That’s around half of the fund’s assets!

Could that happen here?

Well, it sort of already has. Let’s not forget Gordon Brown’s raid on pension cash back in 1997. Having noticed that the pension funds were well financed, he spotted a golden egg. He just couldn’t resist taking it.

And that was at a time when the government was relatively solvent!

It doesn’t even matter which political party we’re talking about. Just look at the present debacle over public sector pay. Contrary to popular belief, most state workers pay a proportion of their take-home back to the state in return for their pension rights. And now that the government needs to cut down on its expenses, they’re reneging on these existing contractual promises.

I’m not here to stand up for the so-called ‘gold-plated pensions’ of the public sector. All I’m saying is that when push comes to shove, the government will bend and break the rules on your pension promises.

When the nation is in trouble and the politicos see a big pot of cash they can grab, then it’s damned tempting to grab it. The ‘rich’ savers that have prudently set aside savings could get taken to the cleaners.

How you could protect yourself

We’ve been told time and time again that we need to increase our pension savings. Basically, the state doesn’t want to get lumbered with a big bill for millions of idle retirees that couldn’t be bothered to save. That’s why they offer generous tax advantages for putting away your cash into a pension.

Fair enough. But we should always remember what can happen to those savings should our leaders find themselves backed into a tight fiscal corner. We need to take a pragmatic approach about how we save.

As with all things financial, the key is diversification. You certainly don’t want to be reliant on any one form of savings.

I’m all for pensions. For most people the tax advantages are well worthwhile. But there’s something to be said for keeping some of your savings outside the pension system.

I’m seriously considering whether it’s worthwhile making overpayments into a pension. I could save any overpayments in an ISA instead. Like pensions they offer income tax and capital gains tax advantages. Of course, you don’t get your tax straight back on contributions as you do with a pension – but then again, you won’t get taxed as you drawdown your fund.

With ISA allowances now over £10k a year (and with a partner, that’s £20k) it means your ISAs could grow into a serious addition to your core pension. At the same time, it’ll make it harder for the government to ‘grab’ these savings.

And if you’re really worried about the state encroaching on all of your savings, then you can always save physical assets too. Gold, silver, even classic cars and antiques are tangible stores of wealth. When government is in a fix and they need readies, they probably won’t ‘borrow’ your Louis IV wardrobe or your beautiful silver candlesticks and trade them in for gilts!

It’s going to be interesting to see how the authorities tackle the brewing crisis on the continent. If things continue to deteriorate, just watch out for the pension funds grab. What goes for the Continentals could easily go for us too. It’s an uncertain world out there – don’t trust anyone. Especially not the government!

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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  • Peter Kellow

    Thanks, Bengt, for another very interesting perspective

    One big selling point of putting money into pensions that tends to get forgotten is that if you go bankrupt your pension savings are safe. Apart from the tools of your trade, I believe, the only thing that is.

    Worth reflecting on that.

  • MHC

    The problem I have with buying Bonds is that my Broker does not
    trade them and I do not know how much it would cost if they did.

    Can you recommend a Broker?

  • colin burn

    My numbers are approximate, but not far off…
    Yes, investing in pensions is a mug’s game unless you are a rich higher rate taxpayer who has pots of money. Consider that at present an 75k pension pot will buy a 4.5k pension, level, no inflation rises, no guarantees at age 65 (male)
    Compare this to a pensioner who has saved nothing, and claims a minimum income guarantee, giving him about another 3k!
    The man who has saved gets 4.5k, and is taxed about 100 on this, leaving £3k so he is nobetter off than the guy who saved nothing. Effectively, his rate of taxation is 100%.
    Worse, while his money has been invested in a pension, the tax uplift has been stolen by the pension fund holder, levying iniquitous charges- there has been no growth.
    If you leave the cash in drawdown, the Govt will not let you take it all out- and the remainder is taxed at 55% on death.
    A good deal!

  • JW

    Did anyone else get an email from Hargreaves Lansdown yesterday evening regarding Higher Rate tax relief?

    It says “There has been increasing speculation the government is considering removing higher rate tax relief on pensions.
    We don’t know for sure whether this will happen, but if it did, it could be announced in the Autumn Statement on 29 November. Hargreaves Lansdown has written to the government strongly advising it against such action.”

    It goes on to advise you to top up your pension before this date etc. I would have thought that a story as big as this would be all over the financial press today – even if it is only speculation.

    I’m wondering if anyone else has heard this information from other sources, or if I have just received a (very good looking) phishing email?

  • dr ray

    The story about removal of higher rate tax relief comes around every year. Maybe they will one day but as some have pointed out it is already becoming questionable whether its worth putting money in a pension as it is.
    The benefit for higher rate tax payers isn’t as great as usually assumed because there is now a lifetime limit of 1.5 million on what you can put into a pension. Any more and you pay a prohibitative rate of tax on it. Many higher earners will already be close to the limit and as the limit probably wont rise in future even medium earners will come up against it in future so the tax relief will be limited. Years ago you could put as much as you wanted in, take a lump sum and put it back in and claim the tax relief over again but those days are gone.

  • dr ray

    Regarding theft of pensions, I seem to remember that a few years back pension managers were forced (by Gordon Brown) to hold a higher ratio of government bonds to equities so securing a forced buyer for gilts, driving down gilt yields and providing limited returns for investors which is a bit like theft

  • 4caster

    The alternative of saving in an ISA is only marginally attractive.
    Most cash ISAs (limit £5,340 per year) pay less than 3%, and to get over 4% you have to commit the cash for several years at a fixed interest rate.
    Dividend income in Stocks and Shares ISAs is taxed at the Advance Corporation Tax rate of 20%, so that only higher rate taxpayers gain anything here. The main benefit is that capital gains are tax-free, as in a pension fund. There are also a few small perks with stocks and shares ISAs in that bond and gilt interest is tax-free. Most managers charge an annual fee nowadays, including Alliance Trust Savings, also Hargreaves Lansdown for holding shares as opposed to funds.

  • L. Murphy

    You never mentioned that Ireland also has a Pension Fund Levy, 2011 to 2014, 0.6% of the market value of the fund as of the 30th June every year. Lets see how long this is extended to.

  • Tom F

    Government Theft –


    Even the USA is in on the act –

    Anything to pump hard earned savings into worthless government bonds.

  • Ian

    Use an ISA? Not a chance!

    If they can come after your pension savings that they’ve got you to squirrel away through nice tax advantages then I’m pretty sure they could do the same for ISA savings.

    That and I don’t trust the brokers.
    Keep your tax incentives!

  • DST

    Ian, you can just take your money out of an ISA if they become undesirable.
    As far as brokers go, why not just use an online execution only?

  • Franco

    The story about removal of higher tax relief on pension contributions is put out regularly about this time every year by Hargreaves Lansdown and his cronies in the finance industry, in order to drum up more business, allegedly. Note that if you add “allegedly”, they cannot sue you.