For a throwaway remark, it’s achieved remarkable longevity. Indeed, when his obituary is written, no doubt former Lib Dem pensions minister Steve Webb’s off-the-cuff observation about Lamborghinis will once again be taken out for a spin.
That said, the 2015 pension freedoms have surely impelled some people to withdraw the lot from their pension pot and buy a Lamborghini – or if not a Lamborghini, then perhaps a speedboat, yacht or similar indulgence.
The Association of British Insurers, for instance, reckons that pension savers withdrew £2.4bn from pension pots in the first three months of the new pensions freedoms, although a survey by insurer Royal London found that most were intent on sticking the money in a bank or building society ISA account, or paying off debts or a mortgage.
On the other hand, the average size of the pension pots withdrawn by Royal London customers was just over £14,000.
That won’t buy much of a Lamborghini, anyway.
There’s always the State to fall back on…
Might Mr Webb have been wrong when he famously said that the government was “relaxed” about how people spent their retirement savings?
Given the passage of time – and bearing in mind that some Monevator readers, just like your humble scribe, are memory-wise no longer in the first flush of youth – it’s worth reminding ourselves of his words:
“One of the reasons we can be more relaxed about how people use their own money – and as a Liberal Democrat I want to give people those sorts of freedoms – is that with the State Pension coming in, the State Pension takes people above those sorts of means tests.
So actually, if people do get a Lamborghini and end up on the State Pension, the State is much less concerned about that, and that is their choice.”
In other words, elderly people will always have a safety net to fall back on, even if they spend the majority of their savings.
…or perhaps there isn’t
Yet if the government was relaxed back in 2014 about retirees winding up on State benefits after blowing their savings on sports cars, it seems less sanguine now.
In fact, a paper put out by the Department of Work & Pensions in March – which appears to have had remarkably little press coverage – makes it very clear that the government reserves the right to review how individual retirees have treated their pension savings in any subsequent consideration of those retirees’ eligibility for State benefits.
In doing so, it is aligning itself with the more widely-known ‘deprivation of assets’ test that local authorities can apply when evaluating individuals’ eligibility for local authority-funded care home provision.
So here’s what the Department of Work & Pensions actually has to say on the Lamborghini issue, in a factsheet entitled Pension flexibilities and DWP benefits:
Deprivation rule: If you spend, transfer or give away any money that you take from your pension pot, [the] DWP will consider whether you have deliberately deprived yourself of that money in order to secure (or increase) your entitlement to benefits.
If it is decided that you have deliberately deprived yourself, you will be treated as still having that money, and it will be taken into account as income or capital when your benefit entitlement is worked out.
Maybe buying that Lamborghini isn’t such a smart move, after all.
Canny Scots
Savings and ISA provider Scottish Friendly, to its credit, is at least sounding a warning about the deprivation of assets pitfall.
“There’s a misconception that if an individual cashes in their pension and proceeds to spend it in its entirety, they will at least be able to fall back on the safety net of a State Pension – but this is not the case,” says Calum Bennie, a savings spokesperson at Scottish Friendly.
“The ‘Deprivation of Capital’ rule means that if you simply spend your retirement fund, give it away or lose all of your money and end up needing to rely on the State for support, you will only be allowed to do so if the Government agrees with your financial decisions.
“The Government is trying to protect the taxpayer from having to pay twice to support pensioners who misuse their pension pot, but it remains unclear how the DWP will identify what will and will not be accepted as depriving yourself of capital and it gives no guidance as to how people will be allowed to spend their pensions.”
Problems ahead
To me, there are three issues with this.
First, that while Mr Webb’s ‘Lamborghini’ remark has sunk into the popular consciousness, the reality of the rule regarding deprivation of capital is much less widely known. Buy that retirement toy at your peril.
Second, there’s the potential for well-meaning but unlucky, unfortunate, or simply naïve retirees to be retrospectively caught out by this.
Suppose that in all good faith, someone withdraws their savings and places them in whatever is tomorrow’s equivalent of Barlow Clowes, spilt-capital trusts, or Bernie Madoff’s Ponzi fund. At which point, a spotty oik down the local DWP office reduces their entitlement to State benefits, saying that they’ve been reckless.
Clarity about what exactly counts as ‘deprivation of assets’ is sorely needed.
Thirdly, the government itself is guilty of double counting, here. Withdraw a Lamborghini-sized sum of money from your pension, and you’ll promptly pay a large dollop of it in tax, potentially at your highest marginal rate. Yet the Department of Work & Pensions, in its own words, intends to treat you as though you still possessed that full, gross, amount—rather than the amount after tax.
Reader reaction
So what’s your take on it all, dear reader?
Comments, as usual, are welcome – so feel free to make a knowledge contribution to the wider Monevator community.
But please don’t forget that I’m not a ‘pension professional’, but simply an ordinary private pension investor, just like you. So I won’t respond to intemperate attacks, or posters with a penchant for elaborate ambushes.
Let’s all just try to educate each other.
- Read more of The Greybeard’s articles on pensions and deaccumulation.
I agree with your point about double-counting the tax, but the underlying principle is fair.
The contract between the government and the individual is that they incentivise us with tax relief (tax deferment, really) and we agree to save so as not to become a burden on the state.
The real problems are the ever-changing rules and the uncertainty.
The lifetime allowance is difficult enough to manage (who know how big their pot will grow in the next 30 years?) without having to consider every whether every spending decision in retirement might be classed as ‘deprivation of assets’
Dear Greybeard,
From my reading and understanding the rational for the new flate rate state pension, the amount (£150-160 pw) was set at a level that would make you ineligible for benefits, even if that was the only income you had. So if you withdrew all your occupational pension and spent it, the state would not have to pick-up the tab. Hence Steve Webb’s comment about being relaxed about people withdrawing all their pension and spending it.
Presumably, the problem arises if you were ‘contracted out’ of the second level of SERPS and this money was used to boost your occupational pension. This could reduce your state pension down to the current level of £113 pw. Or, you had paid in less than the maximum number of years National Insurance contributions. If a private pension was withdrawn in total and spent this presumably could make you eligible for benefits.
Maybe, a restriction should be in place on private pensions withdrawals.
Restricting withdrawals from private pensions below the level of the flat rate state pension when private and state pensions are combined.
In reality what the government writes today about “deprivation of assets” has no bearing as no government can bind its successors
We will find out the result of pension liberalisation in 20 years time
Australia has had a sort of similar system for 20 years and, quelle surprise, that system works very well for the wealthy but there are an awful lot of Australian pensioners in their 80s who have simply run out of money due to the collapse in investment returns over the course of their retirement
I would simply expect that today’s middle aged will be expected to sell their houses to pay for their remaining years in retirement as:
– the dependency ratio of working age to pensioners will be demonstrably worse
– many younger workers will not own their own homes and pensioners will
Better to have loved and lost than never loved at all.
Is the opposite true in earnings? Is it less moral to earn it and spend it than to not earn it in the first place?
I think the key bit here is intent — the deprivation rules aren’t about the not having of it any more — they are about the getting-rid-of-it in order to qualify for (more) benefits. Bad luck, bad judgement and incontinent spending aren’t really being targeted are they? It’s more a sly donation to the next generation to qualify for benefits that is at stake.
And I don’t think we’re talking about a means-tested Pension here, are we? Just other benefits for less well-off older people. The State Pension will be a tricky one to make means-tested while there is still an assessment based on number of years of NI stamps that make up its calculation: it feels rather more “bought” than “given”.
This subject often comes up on forums in the context of elderly people needing to go into care but not wanting to have to sell property etc. to fund it. They seem to think the tax payer should be doing 100% of this while all the valuable assets go to their relatives. Oh, and the question is always being asked by those very relatives. Funny that!
I think the morality/politics of the issue is one thing, but the practical consequences for pensioners (/Monevator readers) are what The Greybeard is looking at here. 🙂
Does anyone have any experienced of Deprivation of Assets being a factor in pension claims, or are we still too early into the new regime for that?
A bit of googling throws up the phrase “You will not be considered to have deprived yourself of capital if you have paid off debts or used money on ‘reasonable’ spending on goods and services.”
The word “reasonable” in contracts basically says that it’s hard to put in a solid definition, so either everyone is sensible, or they meet in court for a judge to decide what’s reasonable and what isn’t.
From what I’ve read, quite a bit of the early withdrawals of pension money so far have been to pay off debt. Which might be a sensible use of the funds, but only if some thought is given as to how to avoid racking up further debt. It does rather suggest from gadgetmind’s link that his is considered ‘ok’ for the purposes of the deprivation of assets rule.
I think the main benefits we’re talking about here are pension credit and housing benefit, which will affect those on low incomes who rent their accommodation; and of course care fees, which potentially affect people across the wealth spectrum. In practice I don’t think this is going to be a huge change in approach.
One other issue though, is how is pension income going to be assessed in relation to qualifying for help with care needs? Will a pension pot be converted into a notional income, or will it be treated as capital?
@Investor
Very few pensioners benefiting from the new pensions freedoms who have six figure pension pots to will run out of money for several years, probably a decade
Whats written about deprivation of assets now hardly matters, as no government can bind its successors
What I’ve seen personally about deprivation of assets in respect of care home fees is that enforcement is pretty patchy and people who cheat, don’t seem to get caught, just like taxes
@vanguardfan
From the Money Advice Service website:
“How a means test works
The means test looks at:
your regular income – such as pensions, benefits or earnings
your capital – such as cash savings and investments, land and property (including overseas property), and business assets
If your income and capital are above a certain amount, you will have to pay towards the costs of your care.”
Therefore I would conclude quite clearly that a pension should be included as its both an asset and an income
The Care Act 2014 also allows for local authorities to take into account the notional income that an investment (which would include a pension) should produce
There is a link to an interesting Age UK paper on the subject if you motivated
I lean towards Neverland’s view. The Govt. of the day has so much power that if even if you’re just one election cycle away from being able to liberate your own money, there’s no point trying to work it out. They can change anything they want to, so what happens will only be clear at the time – most likely whatever will best keep those individuals in power.
What you can do though is try to grow the amount in question as best you can wherever it is, so if you withdrew it, grow it as much as possible anyway, no bling. Then you will have done the most you can to cover all bases & best ensure you come out alright whichever way the wind blows.
It’s probably safest to assume if you’re middle-aged or younger today that if you get anything at all [from the state pension] when you first are able, it wont make any difference because it will be so little. This should help discipline us to save/invest as hard as possible while we still can beforehand to avoid eating catfood in a cardboard box in winter at the end.
If I am wrong & too cynical on this issue & we actually do get something helpful come the time, then great, bonus & you haven’t lost anything really either, but I sure as sh*t wouldn’t want to count on it….. given human nature & history 🙂
@Neverland
The Australian experience does not necessarily point the way forwards for the UK. Australian super funds are often post-tax, meaning that there is no tax ‘brake’ (brake, not break!) or other disincentive to taking everything at once. Anyone doing the same in the UK sees a massive tax bill. That should give pause for thought.
Of course, this is also another reason why the so-called ‘pensions ISA’ is probably a pretty bad idea. Whether it is so bad that the government implements it only time will tell…
@ Vic Ellis You suggested that “Maybe, a restriction should be in place on private pensions withdrawals. Restricting withdrawals from private pensions below the level of the flat rate state pension when private and state pensions are combined.”
This was of course part of the old system that has been swept away, in that there were no restrictions on drawdown from pension funds if you could show a guaranteed pensions income (from all other sources including state pension, fixed company pension, annuity) of at least £20k pa. It might be argued that that limit was too high: it was dropped to £12k as a transitional measure between Budget 2014 and 6 April 2015. But not a bad idea at all…
@neverland – “Australian pensioners in their 80s who have simply run out of money due to the collapse in investment returns over the course of their retirement”
what have these Australian pensioners been invested in? i don’t know the exact numbers for Australian bonds but I imagine they’ve boomed along with UK/US bonds, and the Australia stock index has been one of the better performers since spring of 2000 i think. if they’re running out of money i imagine they didn’t have enough in the first place. most of them were probably in high-fee active funds as well and we know what they’re like.
Deprivation of assets isn’t a new issue, and has applied in the benefit system for many years, and while there is some subjectivity in the application of the rules, there are fairly clear rules also.
In reality, and from personal experience from my involvement ith my local CAB, people who have built up a good sum in a pension are not taking large amounts out of their pensions and squandering the money. They may be cashing in small pensions or dipping into their pension for a small amount to fund a child’s wedding or that sort of thing, but nothing reckless that I have seen.
Some people may run out of money in retirement, but that is likely to be because they had inadequate pension provision, not because they deprived themselves of capital.
The real issue is that fewer and fewer people will be retiring with defined benefit pensions in future years and I expect the defined contribution pensions people will build up through auto-enrolment will be fairly modest in comparison.
I know an Australian retiree who is advised by his IFA that he can spend 7% per a year indefinitely and will never run out of money. So much for the 4% Safe Withdrawal Rate, and no wonder that some Australian pensioners are running out of money….
This thread has gone off piste somewhat. To get back to the point: the rules are that one intentionally deprives oneself of assets in order to gain from state or welfare benefits.
First, the state has the burden of proving your intent. That is very difficult.
Second, buying a Lamborghini does not deprive you of any assets at all. It just converts your cash into metal and rubber. So the rules just don’t apply to this situation. They would apply, however, if you intentionally overpaid for a car you bought from a relative.
“If it is decided that you have deliberately deprived yourself, you will be treated as still having that money, and it will be taken into account as income or capital when your benefit entitlement is worked out”
So If you were entitled to £XX state pension before you went on a spending spree, you would still be entitled to the same £XX state pension when you had spent the lot. So what’s the problem?
No extra, means tested, benefits of course, and a pretty poor liefstyle, but that would be your choice.
K
on a slight tangent (but still pension related). If you were financially independent but still working, would it make sense to salary sacrifice as much as possible to a pension to minimize income tax and NICs? I think it is possible to take your salary down to minimum wage levels?
Yes, and many people do. You avoid 40% tax, losing child benefit, and can qualify for tax credits.
probably makes sense to sacrifice down to £10,600. I think you would still pay NIC at that level so would not be creating ‘missing years’ when it comes to things like state pension.
It seems like quite a monumental tax loophole, but maybe only few are in a position to exploit it?
You can’t sacrifice below minimum wage, which is around £14k pa for a full time employee.
good spot.. so a quick check of contracted hours x min wage is required to find the salary sacrifice ‘floor’
I wonder how the NICs stuff works, i.e. if you pay £0 NICs then you start ‘missing’ years, but if you pay as little as £1 per month NICs that counts just as well as someone paying £1000 in terms of racking up your ‘years-service’ for state pension entitlement? In other words, from a state pension perspective, maybe it doesn’t matter how much NIC you pay, so long as you are paying something? I haven’t found much on t’internet that is answering this question explicitly..
@Rhino: this is from House of Commons Library Standard Note SN6817, 3 March 2014
“Qualifying years under the single-tier pension will be generated in the same way as qualifying years for the current basic State Pension. A qualifying year will be defined as a tax year during an individual’s working life in which they paid, or were treated as having paid, National Insurance contributions or were credited with National Insurance contributions on earnings of 52 times the ‘Lower Earnings Limit’ (LEL).”
Lower Earnings Limit for 2015-16 is £112 per week. So, pay NI contributions on £5824 (52 x £112) this tax year and it’ll count as a ‘qualifying year’. Pay NI contributions on more than £5824 this tax year and it’ll count as a ‘qualifying year’. There’s no extra pension boost from paying more due to higher earnings – under the ‘old’ pension there was, but that’s been swept away with the new flat-rate pension coming in next year.
@tyro awesome thanks very much
I don’t think we should under-value the state pension. It’s not means-tested, and hard to see how it could become so without rioting in the streets. (I see it being eroded once workplace pensions have been embedded for 20+ years, with a safety net for non-workers. But who knows…?)
Most of us who’ve worked our adult lives and are aiming for early (but not extremely early) retirement should get in the order of £5,000+ a year. The new flat rate pension will be c£7,500 for those who have the full 35 years’ contributions (ignoring transitional effects such as deductions for historical contracting out).
The state pension is a foundation of my retirement planning, although I’ll only get it at 67 and I aim to have retired 10 – 15 years before then.
Annuity rates for someone trying to match the state pension at 67 are c3.5%, so equivalent to having a pot of cash of around £150k – £200k depending on whether you’ll get closer to £5k or £7.5k of state pension. Not a bad retirement present from HMRC. (But as a middle income individual I do feel, as another contributor said, that I’ve paid for it, rather than having been given it.)
I’ll probably get c£5,500 depending on when I retire. Looking at my finances this would pay for the following. (I’m treating the pension as tax free, but that would depend on my other income/capital at the time.)
Electricity / Gas £1,600
Council Tax (inc. water) £2,000
Phone / internet £600
Home insurance £250
Groceries / household £2,000 (so state pension covers only half of this)
Thus my state pension will cover all my household fixed costs (bar maintenance) and half my food bill.
I’ll need other savings / pensions to cover the rest of the food, plus transport. I’d consider those essentials. Above that are nice-to-haves to be funded from elsewhere.
I couldn’t live on the state pension with my current lifestyle and relatively large house, but it would cover about half my current total expenditure.
Great if you can make your numbers work without it, but I value the state pension greatly in my financial projections.
@richard – I totally agree – the state pension is massive! I guess it is wise to plan that you can cope if its not there when the time comes, but if it is then happy days. I certainly wouldn’t do anything to potentially affect it like not paying any NICs. As you point out, it goes a very long way to covering the basics which is fantastic!
When I negotiated a salary sacrifice scheme to bring my wages down just above minimum wage I used this calculator http://www.aviva.co.uk/salary-sacrifice/tsandcs.html and https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye
My pay rises are keeping me just ahead of minimum wage, but I will need to check again when the living wage is introduced.
I have a NI contribution report that confirms that I got full credit for a year on that wage, paying £803. The same report says that cost to top-up a year when I had no contributions is £689, which doesn’t quite tally with the LEL numbers above, but perhaps that’s because I’ve not declared I’m contracting out.
@John B that is *extremely* useful – it even writes the letter for you! many thanks..
The only thing to watch out for when sal sac to minimum wage is that you are not at risk of breaching the lifetime allowance. Depends how much you are sacrificing and how old you are, but £40k for 25 years is highly likely to breach the allowance (assuming the allowance increases by 3% for 25 years which I think another thread highlights will probably not happen either making it even riskier – 40k for 17 years).
Of course if you are in mid 40s just starting, then it you probably have the flexibility to take anytime after 55 to keep under the limit.
Do you have any information on the impact of Type 3A voluntary National Insurance contributions on the Deprivation of Assets assessment for payment for care?
The scheme offers extra Pension in return for the payment of a lump sum to the Government. Our local council has advised us this is classed as Deprivation of Capital.
@Peter Holland
I’m afraid I don’t. I’m not surprised that it’s an issue, though, and I expect the authorities to tighten up on this over the next few years.