Bank Account Style Pensions Linked to Credit Cards are Coming to the UK
The new pension freedoms in the UK have caused a lot of confusion about pensions, drawdown, tax and the ability to take your pension as and when you want it. Now, insurance companies and banks are looking to confuse things further.
Wisepensions not to be confused with Pennywise, an American punk rock band named after a clown in a Stephen King novel are going to create a “bank account” style pension with a credit card attached. These vulture style lending firms along with the likes of Wonga are going to push debt to the hilt at the expense of spendthrift or debt-laden pensioners.
The ‘I want it now generation’ are going to get what they want and poor pensioners who may want to gamble with their pensions or those who think they have no choice due to divorce or credit problems are going to get hit hardest.
This short term political planning will do a huge disservice to baby boomers and to the next generation who could cash-in and spend all their pensions perhaps at the highest tax rate rather than looking outside their pension pots, for example downsizing their house or selling some of their other assets.
Problems of a Credit Card Linked Pension Account
Here are the main problems of a credit card linked pension:
- Tax. How will that be done? They will have to take a withholding tax probably at your highest rate of income tax of 20% – 45%. So, if you take 100 quid out, it is already down to 80 or 55 GBP.
- On top of the tax will be the credit card charge. If it is like other credit cards, this is already 15% APR. So, your 100 quid out at the ATM may now only be less than 50 GBP in real terms.
- Add in late payment charges or default and you can quickly wipe out your pension in a short amount of time.
- It works the reverse of investment returns + compound interest. So, instead of turning a 200k pension pot to 400k in 7 years, you would be shrinking it down to less than 100k in probably a few years.
I hope this is sinking in. This is a chance for insurance companies to cash in on those who need cash now and prey on investors who don’t understand how wise investing and compound interest works.
The wealthy are the ones who are going to benefit again. They have already figured out to take an increased pension rather than a salary in order to build up larger pension lump sums, so they can cash out a larger tax-free 25%. This grows to 30% under an offshore pension scheme such as QROPS for Brits retiring abroad. This new tax loop hole for pensions could cost the treasury as much as £2 billion, but we will find out more on November 30th when the pensions committee reconvene again.
David Gauke who is the Financial Secretary to the Treasury almost admits that the system is flawed and benefits the rich. “These tax cuts are for all savers, not just the wealthy,” he commented. “The well advised were always less likely to hit this particular charge, but the fact that we’ve taken away the risk of this punitive measure benefits many millions of people.”
But, this isn’t the largest problem; it is in the educating of the average man on the street where the government has failed. They should be teaching pensioners:
1) The value of investing at a younger age combined with the power of compound interest to amass a large enough pot for retirement
2) Delaying taking lump sums, so their annual pension income is larger
3) Teaching people to save for longer. Men who reach age 65 can expect to live until they are 84. Women can expect to live until 86. That is 30 years after they reach 55. People need larger pots. Spending pension pots quicker puts stress on the state
4) How to invest wisely and diversify pension monies to protect themselves
5) Teach people to try to work longer and take their pensions later for health reasons. More than 6 out of 10 retirees 65+ have a long term illness. If you can keep working until you are 65 rather than 55, not only will your pension income be higher and pay out over 20 years rather than 30 years, but you are also less likely to be ill.
A credit card linked “bank account style” pension is the wrong way to go. Are we going to pile more consumer debt and private household debt on top of the huge government debt which the UK already has? UK government debt is 1.3 trillion GBP (2013) or 90% of GDP. UK household debt has quadrupled since 1990 and is 135% of household earnings. So, if you think the government is maxed out on debt, it is nothing compared to household debt and now they want to push the envelope out again more. Great vote winning tactic, terrible for long term savings of pensioners.
Your pension should not be treated like a bank account. A bank account is somewhere you place your money for safety and is used for every day spending and saving.
A pension is a long term savings and investment account. Let compound interest do its work. Put money in at a younger age and take it out as late as you can. Delay the lump sum so that you have a higher pension income, only getting the lump sum if you absolutely need it. This will give yourself the best chance to have the dream retirement you want.
Then, if your pension pot money isn’t enough to live on, you can always think about moving to another country where it is cheaper to live such as in Bulgaria, Turkey, Thailand, Greece or Portugal. In these countries, you can live cheaper for longer.
Furthermore, you can transfer your pension to a QROPS where you can access a larger lump sum tax-free and you will pay a much lower income tax. As a further bonus there is no tax on death if structured properly.