One of the biggest changes to pensions announced in the 2014 Budget was that if you have a pension pot worth less than £30,000, you can take the entire thing as a lump sum – with a quarter tax free. Before March 27th 2014, you had to have a pot of less than £18,000 to qualify.
The change is significant – as despite needing around £300,000 for a 'basic cost of living' in retirement, the average pension pot in the UK is actually around £30,000. But just because you can take it as a lump sum, should you? And what could you do with it if you did?
Why take a lump sum
For a nation brought up on pensions, taking the whole pot as a lump sum may seem naughty, irresponsible even. But it actually makes financial sense.
The alternative is buying an annuity at a terrible rate that barely pays anything. Independent pensions expert Ros Altmann, speaking to the Financial Times, estimated that a 65 year old retiring with a pension pot of £30,000 would have to live until the age of 90 to see a return on their annuity investment – while the insurance company earns 3.5% interest on the fund.
That doesn't sound like too good a deal. And nor would you receive much of an income from that annuity. Aside from the loss-making perspective, there is a certain logic to eschewing such a small guaranteed income in favour of a lump sum you can enjoy now. Particularly since those with lower incomes tend to live shorter lives. Correspondingly, if you've a smaller pension pot, it follows that you probably won't make it to 90.
So what can you do with your £30,000?
Buy a Lamborghini
You could, as pensions minister Steve Webb suggests, spend it on a Lamborghini. He's on record as saying he doesn't mind if you blow your fortune to spend your days bothering the neighbourhood in your sports car and need to live off state benefits as a result.
Except, obviously, Lamborghinis cost a hell of a lot more than £30,000. But you could still afford a nice Nissan and maybe some colourful rims. Or spend it on an equivalent non-vehicular extravagance. A long cruise perhaps.
One thing to be careful of: although Steve Webb is “relaxed” about you spending your non-fortune on frivolous fun, you need to stay on the right side of the Deliberate Deprivation rule. The rule dictates that if you have deliberately expunged yourself of assets that would otherwise have been included on a means test for later-life care, your funding could be affected.
As it stands, simple spending doesn't count as Deliberate Deprivation, but with the possibility of such asset removal becoming positively commonplace, there's a chance the definition could shift to adapt.
Play the markets
The most 'sensible' option would seem to be attempting to grow your sum. Found yourself with less money than you need for a comfortable retirement? Try and get more.
Of course, hardly anyone manages to get rich quick. Stock markets are best played long term, particularly if you don't have much capital – riskier plays tend to be made by institutional investors with lots of other people's money to play with and enormous resources to back up their decisions.
You could always try Forex, where leverages of up to 500:1 (investing £500 for every £1 of capital) are consistently used to make large profits out of tiny movements and not very much money. But it is very high risk and you could end up owing more money than you make, particularly if you've never done it before. Leverage works both ways.
Blow it in Vegas
If you don't fancy spending the first few weeks of your retirement sweating in front of a laptop, watching your hard-earned pension disappear in a matter of seconds, you could always try doing it the fun way. Hop on a plane to Vegas and take your chances on roulette.
All casino games are carefully designed to put the odds in the house's favour, giving the player just enough to make the game fun. But there are ways to put the odds in your favour if you put the work in.
For example, 19th century British engineer Joseph Jagger identified a flaw in roulette: the wheels often develop a bias towards particular numbers as a result of mechanical imbalances. By recording the outcomes of six roulette wheels at a casino in Monte-Carlo over time, he identified that one wheel had a clear bias towards nine numbers.
Using this information he managed to amass £65,000 (around £3,250,000 in today's money) in the space of a few days.
Naturally, casinos got wise to this and now change the wheels on a regular basis – much like how counting cards started as a clever way of tilting Blackjack in your favour and is now illegal – but if you can identify a new probabilistic loophole and combine it with a good betting strategy you could turn that £30,000 into something much closer to a decent retirement income, and have a nice holiday while you're at it.
Seek professional advice
Truthfully, of course, your chances of significantly growing your pension pot in a relatively short space of time are slim. Instead, using it to bolster your state pension without an annuity provider taking a cut is probably a better idea, or even using it for some home improvements (for example).
But before you do take it all as a lump sum, it's worth seeking some form of professional advice. It may affect the retirement benefits you receive – and you'll definitely need them.
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