Credit Card Linked Pensions are Coming
Credit cards for pensioners are coming… Well whoopee doo, another feather in the cap for George Osbourne and the death knell for pensions in the UK. This is just what the man on the street needs like a bullet in the head… more debt!
How about more education on the role of compound interest in a pension pot or how to save earlier or how to invest wisely?
The ‘I want it now generation’ are going to get what they want and this short term political planning will do a massive disservice both to the next generation and to baby boomers who will look to their pensions for easy money rather than looking outside their pension pots, for example downgrading their main residence or selling some of their other assets.
“Wake Up Savers” – your pension is not a bank account despite reports in the Telegraph that a pensions company, Pennywise will be offering credit cards linked to pensions.
Your pension should be their to give you an income for life.
Something that the government have now backtracked on. HMRC clamped down tightly on schemes before such as QROPS in New Zealand which allowed pensioners 100% cash in, but now they have done an ubrupt U-turn.
George Osbourne changed the tax rules last year which opened up UK pensions and gave investment decisions back to pensioners. They can now choose when to take their pension and aren’t locked in under old GAD rules. They can take as much as they like.
On the face of it, this is a good thing right. You worked hard for your money and you should be able to take as much of your pension whenever you want, right? Wrong. Less than 20% of fund managers who manage money on a daily basis can beat the market, what is the chance of Joe Bloggs getting it right with little to no financial education. Even the experts can’t agree and have trouble getting it right, but at least most of the experts understand risk.
How this credit card work is a mystery as such and even though there are pension freedoms, it would be difficult to make this work given the restrictions at the moment or could end in default and heavy charges for consumers.
The strategy director at Legal & General says it best, “A pension scheme is not like a bank account. If you want to take money out, even under the new flexibilities, you have a raft of HMRC paperwork to go through, and it will take at least a couple of weeks to get the money out.
“I think consumers have been given completely false expectations by the media, and that will eventually come home to roost.”
Adrian Boulding continues, “The other thing I would say to consumers is that they can only spend the money once. I have a bank account that is topped up every month because I earn some more money in the form of my salary. This pension account can only be spent once by consumers.”
Legal & General are a large established conservative insurance company. But, as new entrants like Wonga have proved, first mover advantage will favour anyone who opens a credit card linked pension account.
But, anyone setting up such a service would be doing pensioners a massive disfavor. Why?
1. Understanding the taxation. The lump sum would be taxed 25% and the rest would be at the marginal rate of tax of 20% to 45%. The company may have to employ a withholding tax with clients perhaps overpaying and spending months to get tax back from HMRC, if they can work it out and be bothered to file the tax report.
2. Loss of compound interest and fund growth. Your pension grows each year with compound interest. That is what can turn a 200k pension into 400k in 7 years. If you chip away at 55, you might have spent your pension by 65, whilst a prudent investor who waits until he is 65, can live off a pension of at least 20k per year.
3. Living longer. We are all living longer. Men who reach 65 can expect to live until 84. It is 86 for women. What is the pensioner going to do who has spent their pension by 65?
4. We are living longer, but not healthier. Spending your pension earlier could well mean working later in life, but is this realistic? 59% of people aged 65-74 and 66% of people aged 75 and over have a long term illness. 24% of those aged 75 and over had attended the casualty or out-patients department of a hospital (General Household Survey stats).
If you want to look after yourself later in life, rip up your current credit cards or link them to your debit card and pay off any loans you have. For younger people, start saving earlier, it is not timing the market that matters, but time in the market. Compound interest works wonders.
For those lucky enough to be British expats, you can avoid all taxes on death on your pension and most of the tax on income through a transfer to an offshore pension via a QROPS.A Credit Card Linked to Your Pension – Great News! by Richard Malpass