Little known ‘Deprivation of Capital’ ruling could trigger financial calamity for those who burn through pensions’ cash warns The Personal Finance Society
24 November 2015
- As £5 billion of pensions’ savings unlocked, PFS issues stark warning of sleep-walking into a poverty scenario
- Little known Deprivation of Capital ruling will deny pensioners State top ups if they are proved to have burned through all their private pension funds
- PFS chief executive warns on grave financial ramifications
THE STAMPEDE to cash in on pension savings could lead to a grim ‘self-deprivation’ scenario for thousands of retired and soon to be retired people, The Personal Finance Society (PFS) has warned.
Reports of consumers unlocking around £7 billion from pension funds have triggered concerns that thousands who have scrambled to access capital saved within previously inaccessible funds could face poverty and deprivation in later life due to a change in State welfare rules.
“One unwelcome consequence of the rule changes to pension fund access is the ‘Deprivation of Capital’ ruling which was ushered in by the Department of Work and Pensions to coincide with the pension reforms,” said PFS chief executive Keith Richards.
“The DWP issued regulations suggesting that it would assess people’s pension decisions when it comes to assessing their entitlement to benefits.
“The rule effectively means if, as thousands of people appear to be doing, you spend or give away your retirement fund and end up having to throw yourself upon the mercy of the State for support, money will only be forthcoming if the DWP agrees with your financial decisions,” said Richards.
“Pensions’ freedoms have clearly been welcomed by many and the PFS estimates the Treasury has already taken close to £700 million tax from the funds, which of course doesn’t include the taxed amount when consumers spend the money.
“All well and good,” said Richards – “BUT we know people are now living longer and concerns prior to the announcement of pension freedoms were based on the evident risk that retirees would not have sufficient income in their later years and the increasing burden on the NHS and welfare state is a ticking time bomb.”
“With over half of the pension money so far being converted to cash and short term objectives with even less focus on financial planning for retirement years, The Personal Finance Society has already raised its concerns with Government over the lack of understanding regarding Defined Benefit (DB) pension transfers.
“The Financial Ombudsman Service (FOS) is already reeling from a substantial volume of complaints regarding the lack of available advice, which is a requirement for all DB pension fund transfers over £30,000.
“The FOS reported last month that it had already received over 600 complaints from ‘insistent consumers’ since the reforms were introduced back in April who couldn’t find an adviser to facilitate a transfer unless they felt it was in the clients best interests.
“We are seriously concerned that consumers spending their pensions’ savings too early will be sleepwalking into future self-deprivation.
“The message is clear: spending your pension savings or giving it away to your children now may well exclude you from additional state support based on the new ‘self-deprivation’ rules which came into force back in April of this year.”
“The general perception is that people qualifying for Pension Credit cannot afford to give anything but small sums away.
“But with the likelihood that more people will be exhausting what savings they have built up in pension funds, self-deprivation rules are going to be a key tool for future governments and people need to be fully aware of the difficulties in retirement they might be sleep walking into,” warned Richards.
