Cashing in a tiny pension fund
Discussion
My wife has just found out that she has a tiny pension fund with Zurich worth the princley sum of £820. She is 42 and remembers paying in to a fund for a couple of years when she was in late teens . Apart from paying into it again, or transfing it,or leaving it, is there any way of cashing it in as it's hardly worth keeping
Unfortunately not. Unless your wife is over 55 (which you stated she isn't) then early payment of a pension will incur the wrath of HMRC. This early payment would count as an unauthorised payment under tax law and your wife will be hammered for tax and might even end up without a pension and owing the tax man.
The pension regulator is looking into this practics known as 'Pension Liberation'.
The pension regulator is looking into this practics known as 'Pension Liberation'.
Highrisedrifter said:
Unfortunately not. Unless your wife is over 55 (which you stated she isn't) then early payment of a pension will incur the wrath of HMRC. This early payment would count as an unauthorised payment under tax law and your wife will be hammered for tax and might even end up without a pension and owing the tax man.
The pension regulator is looking into this practics known as 'Pension Liberation'.
Love it when people give advice with little real knowledge.The pension regulator is looking into this practics known as 'Pension Liberation'.
If the insurer is willing to allow the encashment the fund now, which is unlikely, then tax charges totalling 55% of the fund would be imposed by HMRC.
I do recall they were reviewing how 'small' pension pots could be accessed with a view to affording encashment but I thought that was on retirement, not ahead of time. I have a similar pot worth about £10K and my wife has several worth about £1K each from employers she has been with for relatively short periods.
PurpleMoonlight said:
Love it when people give advice with little real knowledge.
If the insurer is willing to allow the encashment the fund now, which is unlikely, then tax charges totalling 55% of the fund would be imposed by HMRC.
I have seen people's pots been reduced to nothing from pensions liberation. Admittedly, they were very small pots.If the insurer is willing to allow the encashment the fund now, which is unlikely, then tax charges totalling 55% of the fund would be imposed by HMRC.
How? Well pension liberation companies usually charge 25% of the fund to 'release' the pension citing that this is a mixture of HMRC charges and their commission. This amount can be (and I have cases where it has been) up to 50% of the total fund. So, paying 50% 'charges' and commission, then being hit by 55% HMRC tax on the WHOLE amount (as the tax requirements state) means the poor beneficiary has to PAY extra tax charges. Would you like me to spell that out for you, PurpleMoonlight?
I am intrigued to hear your reasoning for any insurer allowing a scheme member to release their pension before age 55. If you know of any insurers doing that, can you let me know so I can investigate them for breaches of law please?
What these liberation companies do is provide paperwork to make it look like a member is transferring to another scheme.
Michael, please look at the following link for information straight from the Regulator itself
http://www.thepensionsregulator.gov.uk/regulate-an...
Edited by Highrisedrifter on Tuesday 20th September 20:59
Highrisedrifter said:
I suppose working at OPRA since inception and then at the Pension Regulator working on Pension Liberation cases and helping draft the Pensions Act 2004 doesn't qualify me for much .....
Obviously not.It is not unlawfull to fully encash your pension fund, and pay the appropriate resuting tax charges. It's hasn't been since April 2006.
As far as HMRC are concerned an 'Unauthorised Member Payment' is not an 'Unlawfull Member Payment'. It's just that unauthorised payments carry a tax charge whereas authorised payments do not. There would be nothing unlawful in an insurance company doing this so you have nothing to investigate. I would have thought someone working at OPRA's and the Pensions Regulators office would know this. That you don't is very disconcerting in fact.
The so called liberation schemes are something completely different as they seek to realise the funds and avoid the tax charges.
You need to differienciate between what is lawfull and what is not when you seek to give advice.
See here too:
http://www.fsa.gov.uk/pages/consumerinformation/pr...
TPAS (a government funded not-for-profit independent organisation, ie a quango) and the Pensions Ombudsman have dealt with a number of formal complaints against relevant parties where the FULL implications and risks associated with "pensions liberation" have not been explained to the person considering it.
I, too, think pension liberation is not unlawful; it may be made unlawful soon. Regretfully, those recommending it do so on the edge of professionalism, in my view.
You could contact TPAS seeking their free, impartial views about pension liberation, and then seek an IFAs advice if you were still keen.
R.
http://www.fsa.gov.uk/pages/consumerinformation/pr...
TPAS (a government funded not-for-profit independent organisation, ie a quango) and the Pensions Ombudsman have dealt with a number of formal complaints against relevant parties where the FULL implications and risks associated with "pensions liberation" have not been explained to the person considering it.
I, too, think pension liberation is not unlawful; it may be made unlawful soon. Regretfully, those recommending it do so on the edge of professionalism, in my view.
You could contact TPAS seeking their free, impartial views about pension liberation, and then seek an IFAs advice if you were still keen.
R.
Regarding keeping money in a pension:
- ask about transfering it to another fund that you have
- it might be worth taking a hit on this as, despite any calculations anyone will show you, these companies are truly horrific to deal with if my experience is anything to go by. For a few quid it is better to bite the bullet and only deal with one of them when you are a lot older and don't want the hassle.
- you'll take a massive hit according to the above posts.
- this hit is based on a number that represents a projection based on a payment that happened 25 years ago under one set of rules to 25 years into the future by which time there will be another set of rules. The money minus the hit is just the projection under todays rules. In other words you have a non real ammount of money minus a number based on a non real ammount of money which equals an ammount you can actually put in your wallet.
cymtriks said:
Regarding cashing in:
I don't think this is strictly true - the hit will depend on surrender penalties (as specified in the contract), if any, plus the HMRC tax charge (which would presumably be linked to the tax relief received in the first place).- you'll take a massive hit according to the above posts.
cymtriks said:
- this hit is based on a number that represents a projection based on a payment that happened 25 years ago under one set of rules to 25 years into the future by which time there will be another set of rules. The money minus the hit is just the projection under todays rules. In other words you have a non real ammount of money minus a number based on a non real ammount of money which equals an ammount you can actually put in your wallet.
In this case the fund value is effectively the value of units (adjusted for any surrender penalties, as above) and no projection is required.
Under a with-profit / deferred annuity contract the benefit at retirement is often expressed in £ terms. In this case the value of the policy at any point will then necessarily involve a projection / discount of that future benefit.
Sidicks
sidicks said:
I don't think this is strictly true - the hit will depend on surrender penalties (as specified in the contract), if any, plus the HMRC tax charge (which would presumably be linked to the tax relief received in the first place).
The tax charges that HMRC impose, the unauthorised payment charge and the scheme sanction charge, are not linked to the tax relief the individual has enjoyed. They are therefore arguably more penalistic for a basic rate tax payer than they are for a higher rate tax payer.Edited by PurpleMoonlight on Sunday 24th July 10:59
PurpleMoonlight said:
The tax charges that HMRC impose, the unauthorised payment charge and the scheme sanction charge, are not liked to the tax releif the individual has enjoyed. They are therefore arguably more penalistic for a basic rate tax payer than they are for a higher rate tax payer.
Ok, thanks - I did say "presumably", as I wasn't sure!Sidicks
PurpleMoonlight said:
Obviously not.
It is not unlawfull to fully encash your pension fund, and pay the appropriate resuting tax charges. It's hasn't been since April 2006.
As far as HMRC are concerned an 'Unauthorised Member Payment' is not an 'Unlawfull Member Payment'. It's just that unauthorised payments carry a tax charge whereas authorised payments do not. There would be nothing unlawful in an insurance company doing this so you have nothing to investigate. I would have thought someone working at OPRA's and the Pensions Regulators office would know this. That you don't is very disconcerting in fact.
The so called liberation schemes are something completely different as they seek to realise the funds and avoid the tax charges.
You need to differienciate between what is lawfull and what is not when you seek to give advice.
Thanks for your kind words. I didn't at any point say that an unauthorised payment was unlawful, merely that an insurance company would be investigated if found to be complicit in liberation. Possibly I could have used the word 'potentially' when I spoke about an unlawful act, for which both you and the OP have my apology. However, what you think about me or the Regulator is of no consequence to me and I shan't lose sleep over it.It is not unlawfull to fully encash your pension fund, and pay the appropriate resuting tax charges. It's hasn't been since April 2006.
As far as HMRC are concerned an 'Unauthorised Member Payment' is not an 'Unlawfull Member Payment'. It's just that unauthorised payments carry a tax charge whereas authorised payments do not. There would be nothing unlawful in an insurance company doing this so you have nothing to investigate. I would have thought someone working at OPRA's and the Pensions Regulators office would know this. That you don't is very disconcerting in fact.
The so called liberation schemes are something completely different as they seek to realise the funds and avoid the tax charges.
You need to differienciate between what is lawfull and what is not when you seek to give advice.
There is nothing 'so called' about pension liberation. Many liberation practices seek to allay the customers fears over tax by stating there will be a small tax charge. This 'small tax charge' can equate to 55% of the total pot before commission is taken, as I said above. Many unwitting members are hoodwinked by unscrupulous IFAs that this practice is perfectly fine. That you claim it is 'so called' seems to indicate that you don't think this practice is either a) going on, or b) detrimental to the member. Forgive me if I misinterpreted that.
Regardless of whether it is unavoidable or will just incur massive tax charges, I would hate to think of anyone being given the advice that it is in their best interests to release their pension. We are investigating a number of IFAs that have given such advice, for potential prosecution. Please tell me you aren't an IFA?
Edited by Highrisedrifter on Sunday 24th July 19:26
Bing o said:
I don't see why she wouldn't just do this?
It might not be possible.A few years ago I tried to move an old pension sum into my current scheme and was told it couldn't be done. Perhaps the rules have changed since then.
For such as small sum it isn't worth keeping in a pension if it can't transferred.
sidicks said:
cymtriks said:
- this hit is based on a number that represents a projection based on a payment that happened 25 years ago under one set of rules to 25 years into the future by which time there will be another set of rules. The money minus the hit is just the projection under todays rules. In other words you have a non real ammount of money minus a number based on a non real ammount of money which equals an ammount you can actually put in your wallet.
In this case the fund value is effectively the value of units (adjusted for any surrender penalties, as above) and no projection is required.
Under a with-profit / deferred annuity contract the benefit at retirement is often expressed in £ terms. In this case the value of the policy at any point will then necessarily involve a projection / discount of that future benefit.
Sidicks
The only true value of an investment is what you realise it for.
The "worth" of the pension is exactly as I've described it, a projection based on a payment made twenty years ago under one set of rules, a cash in value today under current rules and a payout twenty five years in the future, which will be under different rules again.
Of those values the first is long forgotten, the second is a real ammount that can hold in your hand, the third is just a number on a screen based on some crystal ball formula.
That last bit is important. The faith people have in these schemes isn't exactly supported by the evidence.
- plenty of people have paid in all their working lives only to end up with nothing, as in zero.
- the rules keep changing
- some funds haven't the reserves to meet liabilities
- we are told that we face a "pensions timebomb", this means the rules will change to pay out less.
- pension funds have traditionally held a lot of state debt (not looking so safe now)
- people are already having their assets confiscated to pay for care, enforced contributions (from pension funds?) may be required in the future
- state pensions may be means tested (thus making saving for yourself less worthwhile)
Given that taking a hit based on an imaginary number (what they will claim is the value of the pension) to turn the fund into real actual cash might look like a very smart move.
Starting your own fund might be a good idea to. Not all eggs in one basket and you only have to deal with yourself. Given some of my dealings with financial services that might be worth a lot just on its own.
cymtriks said:
Nope, I'm not confusing anything at all.
The only true value of an investment is what you realise it for.
Well the original post provides the value, and given the comments made by the OP it is a reasonable assumption that this is a defined contribution scheme.The only true value of an investment is what you realise it for.
The valuation given is therefore most likely to be the fund value. Unless there are any surrender penalties (which is unlikely if this investment was made a while ago) then this will also be the transfer value which could be paid to a different scheme.
As discussed above, cashing in the fund is unusual and would be subject to a penal tax charge.
cymtriks said:
The "worth" of the pension is exactly as I've described it, a projection based on a payment made twenty years ago under one set of rules, a cash in value today under current rules and a payout twenty five years in the future, which will be under different rules again.
The 'worth' of the pension is irrelevant to the discussion, which will depend on the performance of the underlying assets until maturity. The value of the pension that can be purchased at that point will also be subject to prevailing investment conditions at that point.None of this is relevant to the OP at this stage.
cymtriks said:
Of those values the first is long forgotten, the second is a real ammount that can hold in your hand, the third is just a number on a screen based on some crystal ball formula.
That last bit is important. The faith people have in these schemes isn't exactly supported by the evidence.
No idea what point you are trying to make?That last bit is important. The faith people have in these schemes isn't exactly supported by the evidence.
cymtriks said:
- plenty of people have paid in all their working lives only to end up with nothing, as in zero.
cymtriks said:
*the rules keep changing
Aside from Gordon Brown's tax changes, please explain which rules have been changed for existing defined benefit contribution schemes (ignoring the lifetime limit, which is clearly irrelevant for the OP).cymtriks said:
- some funds haven't the reserves to meet liabilities
Once again you appear to be confusing defined contribution and defined benefit schemes.
cymtriks said:
- we are told that we face a "pensions timebomb", this means the rules will change to pay out less.
cymtriks said:
- pension funds have traditionally held a lot of state debt (not looking so safe now)
This is irrelevant for defined contribution funds, where most members focus on a mix of assets including equities and corporate bonds, and where government bonds would normally only be switched into in the run up to retirement (or as part of a lifestyle strategy)
cymtriks said:
- people are already having their assets confiscated to pay for care, enforced contributions (from pension funds?) may be required in the future
cymtriks said:
- state pensions may be means tested (thus making saving for yourself less worthwhile)
cymtriks said:
It is fairly safe to assume that we will all get less than we anticipate.
What is your point?!cymtriks said:
Given that taking a hit based on an imaginary number (what they will claim is the value of the pension) to turn the fund into real actual cash might look like a very smart move.
As above, if this is a defined contribution, the 'value of the pension' is irrelevant - no "imaginery numbers" required!!cymtriks said:
Starting your own fund might be a good idea to. Not all eggs in one basket and you only have to deal with yourself. Given some of my dealings with financial services that might be worth a lot just on its own.
Ignoring all of the tax benefits (that may of course change).It would appear that you've had a poor experience with financial services - maybe due to a loack of understanding?
??
Sidicks
sidicks said:
cymtriks said:
Nope, I'm not confusing anything at all.
The only true value of an investment is what you realise it for.
Well the original post provides the value, and given the comments made by the OP it is a reasonable assumption that this is a defined contribution scheme.The only true value of an investment is what you realise it for.
The valuation given is therefore most likely to be the fund value. Unless there are any surrender penalties (which is unlikely if this investment was made a while ago) then this will also be the transfer value which could be paid to a different scheme.
As discussed above, cashing in the fund is unusual and would be subject to a penal tax charge.
cymtriks said:
The "worth" of the pension is exactly as I've described it, a projection based on a payment made twenty years ago under one set of rules, a cash in value today under current rules and a payout twenty five years in the future, which will be under different rules again.
The 'worth' of the pension is irrelevant to the discussion, which will depend on the performance of the underlying assets until maturity. The value of the pension that can be purchased at that point will also be subject to prevailing investment conditions at that point.None of this is relevant to the OP at this stage.
cymtriks said:
Of those values the first is long forgotten, the second is a real ammount that can hold in your hand, the third is just a number on a screen based on some crystal ball formula.
That last bit is important. The faith people have in these schemes isn't exactly supported by the evidence.
No idea what point you are trying to make?That last bit is important. The faith people have in these schemes isn't exactly supported by the evidence.
cymtriks said:
- plenty of people have paid in all their working lives only to end up with nothing, as in zero.
cymtriks said:
*the rules keep changing
Aside from Gordon Brown's tax changes, please explain which rules have been changed for existing defined benefit contribution schemes (ignoring the lifetime limit, which is clearly irrelevant for the OP).cymtriks said:
- some funds haven't the reserves to meet liabilities
Once again you appear to be confusing defined contribution and defined benefit schemes.
cymtriks said:
- we are told that we face a "pensions timebomb", this means the rules will change to pay out less.
cymtriks said:
- pension funds have traditionally held a lot of state debt (not looking so safe now)
This is irrelevant for defined contribution funds, where most members focus on a mix of assets including equities and corporate bonds, and where government bonds would normally only be switched into in the run up to retirement (or as part of a lifestyle strategy)
cymtriks said:
- people are already having their assets confiscated to pay for care, enforced contributions (from pension funds?) may be required in the future
cymtriks said:
- state pensions may be means tested (thus making saving for yourself less worthwhile)
cymtriks said:
It is fairly safe to assume that we will all get less than we anticipate.
What is your point?!cymtriks said:
Given that taking a hit based on an imaginary number (what they will claim is the value of the pension) to turn the fund into real actual cash might look like a very smart move.
As above, if this is a defined contribution, the 'value of the pension' is irrelevant - no "imaginery numbers" required!!cymtriks said:
Starting your own fund might be a good idea to. Not all eggs in one basket and you only have to deal with yourself. Given some of my dealings with financial services that might be worth a lot just on its own.
Ignoring all of the tax benefits (that may of course change).It would appear that you've had a poor experience with financial services - maybe due to a loack of understanding?
??
Sidicks
you're bang on Sidicks.
Just shows how a very small amount of knowledge is very dangerous.
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