The information provided in this article was accurate at the time of publishing and should be read in the context of the date it was published. Views in this article are those of the author alone and do not necessarily represent the view of Scottish Friendly.

The Department of Work and Pensions has today issued guidance on how benefits will be considered in respect of people using their pension.

This paper means that the Government’s rhetoric about pensions freedom has taken a big hit today.

The ‘Deprivation of Capital’ rule now being applied to pensions means that if you use pension “freedom” and 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 DWP agrees with your financial decisions.

In effect, the Government is promoting the right of the individual to have control of their pension, but at the same time is reserving the right to decide after the event whether or not an individual used that money wisely.

It’s one thing to say that the state shouldn’t tell you how to spend your own money, but quite another to say the state will tell you after you’ve spent the money as to whether or not they approve of the way in which you spent it. This is not so much pension freedom as pensioner serfdom.

It is 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. For example, is a badly made decision to invest in  buy-to-let property going to be considered a reckless endeavour, or will the Government only apply this rule to those that go out and buy a Lamborghini, which apparently they were previously relaxed about? Where will the line be drawn?

While I understand and welcome that the Government is trying to protect the taxpayer from having to pay twice to support pensioners who misuse their pension pot, the proposals they are putting forward suggest that they are trying to shut the gate after the horse has already bolted. The issue needs to be addressed at the front end of the process, not by bureaucrats making judgements on pensioners with the benefit of hindsight.

What is also not clear is what happens to those people that the DWP deem to be reckless. Without benefits how will they support themselves? Are they simply to be left out in the cold? Who will be protecting these members of our society? We need to address these issues now.

Prior to today, I raised this very issue with Rt Hon Steve Webb, MP at a My Financial Services Event in December – the video of which can be found here.

In the video (conversation starts at 08’15’’) the Pensions Minister says that he was relaxed if pensioners took their money and bought a Lamborghini. Today’s announcement appears to be a U-turn on that viewpoint.

No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting Advisers may charge for providing such advice and should confirm any cost beforehand.