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Paul Lewis: How do you solve a problem like Maria?

She is Maria Sinclair, just 65 and she is happy. Pension freedom has begun. She has a pension pot, which she began some 25 years ago, and she believes it is worth quite a lot.

In work, Maria never earned more than £18,000 a year. Her state pension amounts to £118.64 a week. She has £250 in savings and finds it very hard to manage. With this in mind, she claimed pension credit in 2012, which boosts her income to £151.20 a week.

Her only real asset is her home: she inherited the small terraced house she shared with her mum for the last five years of her life.

When pension freedoms were announced last year she was excited about being able to cash it in. And now she wants help to do so but is not sure how about to go about it. So now she wants help to access her pot. The only trouble is, she is not quite sure where to start. First off, she goes online to look for help.

Maria has heard about something called guidance but she does not know what that really means. So she looks for someone who can advise her what to do.

She tries a website that lists only independent financial advisers (she remembers reading they were best), clicks “pensions and retirement” and finds three promoted. Only two are in her town.

The top one only deals with people who have £250,000. The next
sets the bar at £50,000. Most of the 15 others listed want clients with assets between £50,000 and £500,000. Six will consider “any level of wealth”.  Maria thought her pension was worth a lot but now she is not so sure. For that matter, she doubts whether she has any “wealth” at all.
She calls the first but he loses interest when she says she is on pension credit. She does not understand why this is an issue.

The second has an 0845 number Maria refuses to call (she wants to avoid high charges on a potentially long phone call but soon realises they all have 0845 numbers via this website). The third is 50 miles away. Maria has no car and does not want to spend more than £60 travelling two hours each way on a train.

She eventually finds one in a neighbouring town eight miles and a short-ish train journey away and arranges an appointment for her free one-hour conversation.

Her pot is worth £31,562 – barely more than a year ago because charges are high. How much of that will she keep? Her cheque will in fact be for £22,462 – including her £7,890 tax-free cash – and then she will have to reclaim £5,253 overpaid tax, eventually giving her £27,715. So 12 per cent of this non-taxpayer’s money, nearly £4,000, will go straight to the Chancellor to help balance the 2015/16 books.

How will that £27,715 affect her pension credit? At the moment she gets £32.56 a week. Will it wipe that out? No. It will count as £36 extra income and that will reduce her pension credit by £19.12 a week: £994 a year. Though until she gets the final tax refund she will get rather more.
Next, the £1,219 a year council tax on her house.

Since her mother died she has not applied for the single person’s discount of 25 per cent. That will knock £305 off it, leaving £914 to pay.

But she should also get council tax support from her local council. That would pay all her council tax because she gets pension credit guarantee credit. So will that £27,715 affect that? Yes. She will lose the £914 a year help she could get. But if her pension cheque were £26,000 or less it would not affect it at all. So until her tax rebate arrives she will still be entitled to full council tax support.

And now there is another problem. When she claimed pension credit in 2012 she did not think her pension pot was relevant and did not declare it. But she should have done.

She would have been given a notional income at GAD rates – currently £53 per £1,000 – so Maria should already have a notional £32.16 added to her real income, slashing her entitlement to pension credit by £914 a year, though currently not affecting her council tax support. No one has noticed this. What do you advise?

I guess Maria is already past her hour’s free conversation. And we still have not discussed her house, inherited from mum and worth £208,000. She may want to leave it to her children (although they do not want her to) so is equity release an option? She could borrow about £62,400.

There would be fees to pay. And of course interest on the loan of around £3,750 in year one and compounded up to more each subsequent year. She has no need for this money now but it may be an option for the future. Only a specially qualified IFA can advise on equity release.

So, Maria has a £31,562 pension fund. If she leaves it and declares it her pension credit will be cut by £17.58 a week and she may have to repay overpaid amounts back to 2012. If she cashes it in, the net £27,715 means she loses pension credit and council tax support currently worth £1,900 a year. She would need a return of 7 per cent on her £27,715 to replace that or 5 per cent a year if she was to run down her money to zero over 20 years. And she will probably have to repay more than £2,000 of overpaid pension credit.

Maria is capital-rich. She could liberate nearly £90,000 to make her last 20 years a bit more comfortable. But should she? Who can help? At a price she will pay? And how will she find them? That is the £30,000 problem called Maria.


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There are 18 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 7th May 2015 at 8:47 am

    For any people other than those who regular file SA tax returns, trying to reclaim over-deducted tax (for example from pension funds commuted under the old triviality rules) is a complete nightmare, so bad that a lot of people eventually just give up. Most providers, in my experience, just deduct 40% from the whole lot. I wonder if it’s likely to be any better now we have these new unfettered access rules.

  2. Julian, can you name any providers who don’t use 40% to deduct? As most commuters won’t be HRT payers, this seems wrong for the majority to assume they are.

  3. I always like reading your stuff Paul . .

  4. Paul, i would not advise the client anything unless she paid a fee. The one hour free conversation ( at my expense) is based around whether we can advise and help her and what cost… not give free advice.
    After all Paul, i bet you dont work for nothing

  5. @Kevin Rander – ‘Paul, i would not advise the client anything unless she paid a fee. The one hour free conversation ( at my expense) is based around whether we can advise and help her and what cost… not give free advice.’

    I think that is the point the article is trying to make…the ‘problem called Maria’.

  6. @paul joyner
    Ive listened to numerous programmes when Paul has actively encouraged to goto an IFA and get free advice…just like Martin Lewis !!!!

    • I think the point you made in your previous comment about the first initial ‘free’ hours session being more about if you can help and the likely costs rather than giving any ‘advice’ is very relevant – what this session will entail may be very different across advisers and peoples (Paul and Martin included) opinions….

      The fact would still remain that it is likely that ‘Marie’ in this instance would still be left with no answers to her questions

  7. Julian Stevens 7th May 2015 at 2:30 pm

    I’ve not dealt with enough such cases/providers to know which of the latter don’t deduct 40% from the whole lot but Prudential were adamant that this was the way they had to do it, which was particularly annoying as the pension fund in question wasn’t even in excess of the policyholder’s Personal Allowance and she’d already given up work.

    FWIW I preferred the old format for the magazine. Why change it?

  8. MALCOLM SNOOK 7th May 2015 at 2:36 pm

    Paul, very good thought provoking article. A dilemma agreed but I also agree with previous comments, if she wants the government introduced free advice, go to CAB or MAS etc. I would be interested to know if they could understand the areas you discuss within your article? Also you appear to have given a lot of information away within the first hour, assuming you also included all the fact finding, disclosure information etc, I would find it hard to accept that any IFA would have access to all the GAD rates, Equity release rates etc within a first meeting with a prospective client or that the client could provide the level of detail you mention.

  9. 🙂
    As a part of the jigsaw, please take a look at this:- and perhaps keep it handy for when clients suggest they may take the whole fund. You will be able to show them the initial tax deduction. There may be exceptions to day 1 month 1 taxation if the client has been receiving an income from the provider.
    I no longer advise, but keep an interest in what the industry does and advisers opinions of current issues.

  10. Dominic Thomas 7th May 2015 at 2:49 pm

    What a fantastic example Paul. Sadly it reveals how we have all failed to connect with Maria over the last thirty years or so… advisers, journalists, providers and regulators. There are presumably thousands of people just like Maria… the hills are alive with them.

    However, perhaps pension freedoms are not a good thing for Maria. Perhaps she ought to be thinking of simply securing an income for life. Whilst I appreciate the very good intent of ensuring that her various benefits aren’t turned off, in essence benefits are meant to help those that have little resources, not those that have them. Obviously this is a contentious point, I didnt make the rules or draw the lines. You have however provided enough information in your story that people like Maria can learn from and apply some common sense for themselves, yet miss the most fundamental point of “how much does she need to live on?” and “does she have a proper budget that she manages?”. What is her state of health? how about considering selling the house and renting? £208,000 will go a reasonable way on rent? perhaps some of the questions are uncomfortable, but the issue is surely not how can I stay in my house, but what sort of income do I need to support my lifestyle.

    Sadly she had no idea about the value of her pension and its high charges, it is a great pity she didnt take more interest rather earlier (we have failed her) however common sense also suggests that those that fail to plan, plan to fail…. and yes I know its harsh and I know its not easy, but perhaps had an adviser done a proper job reviewing her existing arrangements and explaining these issues previously she wouldn’t have the same degree of “problem”… unless she is a vulnerable client, she cannot live as though she’s sixteen going on seventeen, when in fact she is sixty going on seventy.

  11. Poor old Maria. Exactly the sort of client that will eventually get ripped off. It rather highlights why Boy George is such a plonker. He should have just increased the Triviality Rule to £50k. She could then have taken the lolly form the pension company=y without having to travel or pay for advice.

    Much as we may sympathise with Maria – and I’m sure there are huge number of worthy causes, but please remember Paul – we are not benefit agencies. Maria is no more suited to an IFA as she is to a Bentley dealership.

    BTW – Agree with Julian – preferred the old format. Why fix it if it ‘aint broke?

  12. It’s a good illustration of the issues facing many retirees in the new pension enviroment. However, every single issue highlighted has been inevitable as a result of the politically-motivated timetable and lack of joined-up thinking by government and regulators. While I respect Paul and believe he performs a valuable role, he has previously been flippant about the lack of consultation and foreplanning. It is a bit rich when those who were very vocal in supporting the reforms are now highlighting the problems people are facing, as if the two were unconnected.

  13. Very interesting article. Notwithstanding the extraordinary complexity that means tested top up benefits create at all stages of life, I was most amused by two things.

    a) The notion that Maria suddenly realised that with her £30K and no savings that whe isn’t wealthy after all – If people work 40 years, earn the average £25K a year in real terms throughout and tax deductions take say 30% away – then their total net earnings for their entire working life whcih is to to provide for them both throughout those 40 years and a further 20 years of retirement is £700,000. From that must be paid the food, enerygy and other bills, the cost of a home purchase (say), clothes, travel etc. Where, realistically is the £200,000 pension pot coming from that is required to pay £10,000 in retirement? Answer: it isn’t. So £30K of pension pot is, on the one hand the best part of bugger all and you should ask why she’d bothered to save up at all given that it’s pathetically small, and yet on the other hand, as a lump sum £30K is a lot of money. What it tells us is that retirement is very expensive and the £150pw income guarantee alone costs the state £160,000 to fund. If the average person only pays £300K in tax in their entire working life then they never actually pay enough tax to pay for their retirement even at just the basic state pension rate. [We definitely need all those high earners and nondoms to stick around in the country to subside the majority.]
    b) I like the “finding an IFA” farce as well. But, Paul, you need to look at the regulator for causing that by loading such huge regulatory costs onto advisers that the price of advice is too high for most people. When you add to the mill the regulatory desire to require compulsory advice before any transaction takes place (as we heard today) and the FCA’s ludicrous guidance on “insistent clients” and you’re going to create a minefield in which conusmers are going to get very very angry – many of those who want advice cannot afford the cost; many who don’t want advice will be forced to get it or they will not be able to access their own savings; and having written a fee cheque out to an adviser they don’t want, and rejecting the advice, they are unable to do with their savings what they want because teh FCA will not allow IFAs to carry out an inisistent clien’t wishes.. It’s a right old Stalist web being woven and there will be rage amongst the populace when they find themselves unable to get access to their own property.

  14. Peter Robertson 8th May 2015 at 5:06 pm

    In most respects, Maria has already learnt most of what there is to understand: few would know the position with lost benefits etc without help/guidance from CAB. Short answer from me would be to take the pot over a couple of years (less tax). Use it to do any work needed to the house or have a nice holiday then sit back with (after spending) 10k in her bank account, no reduction in pension credit and a house she can downsize from in due course but now worth a little bit more than 208k.

  15. David Stoddart 9th May 2015 at 5:30 pm

    For me the first hour is at my own expense. Yes that does not include any advice but only to establish the clients circumstances, explain my fees and see if the client wants to proceed.

    Yes there are a lot of things to consider with the client but nothing that cannot be thought through and the client given advice which is best for their circumstances. I am a financial planner and if the client is happy to pay my rate then they will get my advice. I don’t get people only wanting to deal with people with certain wealth maybe they are not financial planners but just product salesman.

    As Paul will appreciate from this clients circumstances it is not a straightforward and the client definitely needs advice.

    @harrykatz you need to be careful just recommending people take funds under triviality because if they blow them you are leaving yourself open for a claim in a couple of years if you haven’t planned it out for the client.

  16. David

    I think you missed the point. I (and probably most others) won’t be advising these kind of people. They will just have this as an option from the provider along with all the fatuous annuity illustrations. They will then make their own mind up – without taking paid for advice – and they will take the money and run.

  17. Martin O'Kelly 11th May 2015 at 7:05 pm

    Thanks Paul – an excellent article. Should be incorporated into every Adviser’s CV

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