Pensions freedom is now with us: but those carrying debt should be additionally cautious about rushing to cash in, argues Tony Watts OBE.

Hardly had the day dawned on new Pensions Freedom when the first person to break cover and announce their plans has been dug out and featured by the media: a 57 year old from my neck of the woods in Somerset is taking a lump out to help patch up his local church roof… and to take his wife on a cruise.

That said, he also sounds very aware about the tax punitive implications for taking out money above the allowed threshold. Those thresholds are the reason why the Government is confident that most of us (or at least those of us with sizeable pension pots) won’t be rushing out to purchase a Lambo. Me, I’m checking out whether they still sell Reliant Robins…

But how confident should the Government be that we will be careful about splurging our savings and leaving future generations to pay for our old age?

Over the last few years I’ve watched the new pension reforms taking shape and – having been involved with some of the consultation process – I have nothing but admiration for many of the long overdue reforms now taking place. Steve Webb in particular must take huge plaudits for the single tier state pension, albeit at zero cost to the State so current pensioners won’t be part of that, and auto-enrolment.

Reining in the exorbitant fees is another achievement, so too enabling many older women to have a decent pension.

The thinking around freeing up of the pensions market and removal of the annuity strait jacket also has his stamp on it.  It’s easily arguable that he is the only person in Parliament who fully grasps how pensions work, and it’s certainly a ‘Liberal” policy in the old sense of the word: allowing people to self determine their future.

Political timing

The timing, however, appears largely political – a much-needed fillip to the economy just before a General Election, as well as a chance for the Coalition parties to demonstrate their commitment to personal liberty over the nanny State.

The downside, however, is that the financial markets are patently not ready for the changes: you would assume (quite reasonably) that when a game changer like this is introduced, the very people who will have to make it happen might have been consulted before the policy and timing were announced, not as surprised as the rest of us.

Pension Wise has hastily been developed to head off enquiries at the pass (they will only warn and signpost, not provide advice); and will 300 people seeking to advice hundreds of thousands be in any better position than the 300 of Sparta?

While those who can afford to take Steve Webb’s sound advice to wait before making a decision will probably do so, my real worry is that financial expediency will drive many to make decisions they could regret longer term.

There are, lest we forget, huge numbers in their mid 50s onwards carrying large amounts of debt – the “squeezed middle aged” who might own their home, but who have remortgaged (possibly more than once) and have been helping to fund their children through higher education.

Some telling figures released by the Equity Release Council on 26 March showed that 31% of older homeowners currently experience financial stress – despite having £241,000 of property wealth. Some 24% have remortgaged for extra funds.

Will the Pension Wise 300 cope?

Over the next few months many may make the decision – not unreasonably – that they’d be better off using their pot to bring down expensive card debt and loans. The likelihood is that they will be passed backwards and forwards from Pension Wise and their provider – and both will issue warnings of the implications of cashing in.

The provider may even be persuaded to cash in the pension plan. Or not: many have signaled they are not ready or able to do so. Equally, they may make some eye-watering charges for allowing the person to draw down a tranche.

Some pension holders, keen to get their hands on the money, will look transfer the fund to another provider who will allow a cash-in, quite possibly paying a handsome premium in return. More worrying, they may fall victim to a scam and end up paying prohibitive rates of tax, their pension details having been sold on to a fraudster.

With an IFA behind them offering sound advice, they may resist the temptations, but those with smaller pots are highly unlikely to turn in that direction.

So while many people could genuinely benefit from losing expensive debt, they may end up selling themselves short. I really don’t believe that was what was intended when the new pension freedoms were designed. Just another 12 months to get the market ready would have sufficed – but it looks like politics has got in the way.

And is there any good news in all of this? Well apart from the fact that a Somerset church roof is now being repaired, there is the hope that all he newspaper headlines in recent weeks might have alerted people to the dangers of withdrawing early. I’m not usually one to commend the scare headlines in our less responsible national media, but in this they may have served a useful purpose.

While the good news for www.RetireEasy.co.uk subscribers is that they can readily assess the impact on their long-term finances for whatever decision they make. Just play out a scenario where you DO withdraw cash… and see precisely what implications it will have – this year and every year going forward.