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.