I was listening to the Yardbirds at work today, and heard the song “For Your Love’’.
A bit later I saw the usual QROPS and SIPP adverts talking about the importance of maximizing death benefits for “ Your Loved Ones’’.
It would seem that a significant proportion of adverts, the ones outside of the UK, cite the primary reason for transferring a final salary pension as provision of funds for “Your Loved Ones’’.
Without going into the primary reason for pension planning- an income in retirement- I thought I would mention liquidity.
Let’s suppose that someone is transferring their pension and the reason for giving up valuable guarantees for income in retirement is that a pension income is not as important as a fund for the family upon early death. Let’s assume that health issues, or lack of cash or something or other means that life insurance is not an option. Skeptical me thinks that it is laziness on the part of the adviser, or inexperience. However, I digress.
So, given the above, I think it is safe to assume that the family would need a quick payout in the event of the death of the breadwinner as the family will need all the money they can get as soon as possible.
If that is the case then why are so many hundreds/thousands of people without investment experience, and who are risk averse, placed into illiquid investments? I am not talking about a balanced portfolio with some exposure to alternative, illiquid, investments here. I have heard of the whole pension being stuffed into such investments.
In the event of death, the funds will not be instantly available. If funds are needed quickly , then it is highly likely that there will be substantial early encashment penalties or no possibility of a quick payout due to a lack of liquidity in the fund.
Also, it is worth noting the issue on non-payment of a lump sum on death from a SIPP if this is two years after death . What happens If the funds are locked into some tree plantation in The Amazon, Store Pods, Suspended Life Settlements, Off Plan Property in some far flung location, Structured Notes and the list goes on ?
Well, HMRC make the situation very clear if someone dies before drawing a pension…. “If you're under 75 when you die the pension scheme should pay the lump sum within 2 years of them becoming aware of your death. If the lump sum is paid late it will be an unauthorised payment and whoever receives it will have to pay a 55% tax charge on the lump sum.“
So, if you have illiquid funds in your pension your family will be penalised if they cash in early or whacked for tax if they wait!
When you see ‘’ Your Loved Ones” linked to QROPS and SIPPS recommendations, make sure you invest in funds that can actually pay them- if that is the prime reason for transfer.
Skeptical me thinks the prime motivator for the recommendation for such funds is the undisclosed and substantial commissions on offer to the salesperson. Often, these illiquid investment projects need funding and so you have to ask yourself a question. "' Why payout large commissions to attract money in a climate of low interest rates? Surely, it would be better to raise the funds from a bank?"
Would a bank lend money to some of these investment schemes?