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 [1] about Lamborghinis will once again be taken out for a spin.
That said, the 2015 pension freedoms [2] 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On the other hand, the average size of the pension pots withdrawn by Royal London customers was just over £14,000.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 [3] 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 [4] 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 [5].