You can’t buy a sausage with a brick

This blog is about how we make sure we have enough cash to pay the bills (including the butcher’s bills)

Cashing out pensions – the lure

In its recent policy statement (P20/6), the FCA leaves two carve-outs (loopholes) for advisers wishing to use contingent charging to ease the advisory bill. The first is in cases of extreme ill health and the second is where the client is proven skint.  I can see sense in both, very occasionally the rules of an occupational scheme will not sanction the taking of the lump sum prior to normal retirement date and even more rarely, it is in someone’s interest to take much more than 25% of the pot up front.

However it is only the exception that proves the rule, the rule is that a pension is a pension.

Since the client/adviser declaration will, on both occasions, need to satisfy the legal requirements of the FCA and the commercial strictures of professional indemnity insurers, it is unlikely that defined benefit schemes will be used to provide greater liquidity, more than once in a blue moon.

Safety in liquidity?

For most people , their three greatest financial assets are

1.  property
2. pension
3. capacity to work,

Property is an immediate utility. It is linked to work only if you need to purchase or remortgage and sadly you are not able to get a sausage from a brick if you have no capacity to work. Selling the family home to pay bills is not going to be easy in the next few months and is only an option for those who own their home.

It’s work and pensions that are the primary source of liquid cash for most of us. Items 2 and 3 conflate in people’s heads. Especially for those over 55, the capacity to fall back on the pension has always been a comfort, it is the safety net if there is no capacity to work.

For many people there will be no capacity to work for much of 2020 and though many will still being paid, the inevitable conclusion is “no-work, no-pay”.

In the UK, money can only be released from pensions once you have reached 55 *.

In Australia , the situation is different. Rather than set up a furlough scheme, (borrowing against future taxation) the Government has allowed savers in Superannuation schemes the chance to take money from their pot early.

The latest results are now in and they make for interesting reading.

So of the 15m saving into Aussie Super around 2m are currently raiding their pots though the average raid is quite small $7.5k in Aussie Dollars is around £4,000.

 Would this work in the UK?

Giving people the right to raid their workplace pensions to fund them as they try to find another job seems , on the face of it, a reasonable thing for Government to do. This is after all an unprecedented time. But it would be the worst thing that Government can do.

The Pensions Regulator estimates that 10% of employers are currently under funding their defined benefit schemes , it could be argued that they are paying wages by not paying into pensions – which sounds rather like raiding pension schemes, but it’s not. There is a Plan B for a defined benefit pension scheme that gets into trouble and that is the PPF.

For private individuals there is no Plan B, in fact by taking money out of the pension pot early, many of us would scupper our own plan B’s.

Because as soon as you make pension funds part of you available cash, you give Government the option to rule you out of the Universal Credit till that money runs out.

Because the money that you’ve spent on yourself today, you’ve robbed from your future tomorrow.

And because if we extend the concept of pension freedom in the way Australia has, we corrupt any remaining legitimacy of pensions as pensions. In so doing we give Government the right for them to rid pensions of their savings incentives (as the Australians have done).

The Australian system works on compulsion, Super is effectively a privately operated tax on wages that defers compensation to later life. Government and unions can change the terms of the contract at their command. The Australian system demands a much higher contribution into funded pension and has been around fo longer.

In the UK, there is no compulsion, people enroll into pensions on a promise of certain incentives in exchange for certain restraints, the single largest constraint left is that the money stays in the pot until at least 55. Pots are typically small as most people haven’t been enrolled for long enough, or saved at Aussie rates to use their pension pots for partial encashments. In the UK, for most people “encashment” would mean taking the lot.

Building Back Better..

I expect the calls for an easing on early encashments will be restricted to  some hard-right policy wonks. They will point at Australia and call the numbers in the infographic a policy success, primarily because it de-risks the general tax-payer and passes yet more risk onto those finding themselves unemployed post-furlough.

But as with the carve-outs created in PS20/6 and the easements on defined benefit schemes to fund pensions, there is precedent for easements at a time of destitution.

I am pleased to see that googling “can I take my pension before 55” no longer leads to a page of paid adverts from lead generators taking you to Qrops and overseas SIPPs.  I am pleased to see that instead, MAPS and other government agencies have taken their place advertising a simple message “no”. Well done MAPS and well done Google.

Instead of entering a debate about early encashment of pensions, I hope that we will consider the positive  #BuildBackBetter .

There can be nothing so stifling of hope for the future than to give up on your retirement savings. Demoralizing indeed to have to raid your super to pay your bills, how much worse in the UK to put in peril the good work of auto-enrolment by turning the motorbike into the sidecar.

We can build for the future in a positive way by making pension taxation fairer, by ensuring that low-paid people get the incentives they’ve been offered and eventually by turning the system of tax-relief around so that it favors those who most need pensions.

* I am aware there are a few people in special professions who can take money from pensions before 55, but they generally know who they are and aren’t  part of this argument