An elderly man lies unconscious in a hospital room, kept alive only by a life support machine.
Away from his hospital bedside, difficult conversations are taking place involving not just his family and his medical team, but financial advisers and lawyers.
A key focus of these talks is the sensitive issue of turning off the life support machine.
Hanging heavy over the discussions is the fact that recent legal changes have made it more efficient, from a tax perspective, for an individual to die before the age of 75, particularly so if you there is a very large pension fund to pass on to heirs (see below).
Significantly, the beneficiaries of the man’s pension wealth will not pay any tax on what they inherit if he dies before turning 75.
If he dies after this, nearly half of the savings he built up over his lifetime could potentially go to the tax man. The family faces difficult decisions.
As incredible as it sounds, this was a real case that was brought to the attention of a financial adviser, after big rule changes to death benefits came into play in April.
“I was shocked when I was told of the case,” says the adviser, who has more than 30 years experience working in financial services and the UK pensions industry, but who wished to remain unnamed.
“When the case was put to me, I did not know what to say.”
While this situation is likely to be uncommon, it throws into sharp focus some perverse behaviours that recent changes to pension taxes are incentivising.
The death benefit changes, along with far-reaching reforms to free up access to pension cash, are creating disputes and tensions in families, and putting financial and legal advisers in uncomfortable positions, as they are drawn into ethical dilemmas.
Financial advisers report cases of husbands — in troubled marriages — seeking to deprive their wives of future income by stripping their substantial pension assets while secretly planning for divorce.
Parents — having gained new flexibility to take substantial pension wealth as a lump sum, rather than an income — are being pressed to cash in by debt-laden children.
Those charged with looking after the best interests of members of defined benefit pensions, are nervous about transfer requests, particularly when there is a spouse who may be in the dark about the potential loss of an income in the future.
These are real life stories which are starting to surface eight months after the big pension changes came into effect, and question the industry and government’s view that most savers are behaving “sensibly”.
Raiding mum and dad’s pension pot
The landmark changes which came into force in April gave over-55s full flexibility to do as they wish with savings built in so-called “defined contribution” pensions.
Before the reforms, most retirement savers would turn their pension savings into an income for life in the form of an annuity.
During the first six months of the freedoms, more than £5bn of pension savings were accessed by hundreds of thousands of over-55s, according to industry data.
Cash, previously earmarked for retirement income, has been spent on refurbishing kitchens, or on holidays and buying new cars, according to pension providers.
But Keith Richards, chief executive of the Personal Finance Society, says one of the most common reasons for people dipping into their pensions is to help children.
“They would rather make sacrifices to get their children out of trouble or see them happier, particularly if they are close to retirement,” says Mr Richards.
Mr Richards says a “lot of good and responsible” decisions have been made by savers making the most of the new pension freedoms and “not blowing the money they have worked hard for”.
“But equally there are some bizarre decisions being made,” he adds.
Advisers report cases of clients acting against their recommendations because they have been pressured by their children, once pension cash has come into play.
In one case a woman in her late fifties had received £415,000 from her husband, in a pension split following their divorce.
Her financial adviser arranged for her share of the pension money to be put into drawdown for the woman, and a sustainable income for her to be taken each year for the rest of her life. It was her only private pension.
However, he was surprised when a short time later the client returned saying she needed extra cash for her children, which amounted to a lump sum of more than ten per cent of the fund.
“One of her children found out that the mother could access the money as cash,” explains Jonathan Rowley, director of Hamnett Wealth, the independent financial advisers. “The requests for help started coming in.”
“We recommended against her taking the lump sum, as we explained it was her pension and we had already agreed what she would be withdrawing each year. We clearly said that volunteering to pay higher rate tax on what she wanted to take out in one go didn’t make financial sense, either.
“We did convince her to slightly reduce the amount she took out, but she took more than we originally advised and said ‘thanks for your advice but I still want to help my children’.”
Mr Rowley says the client remained “comfortable” with her decision but it was a difficult case for the firm to handle.
“As soon as we heard of the legislation, we feared that people would make poor investment decisions because they felt pressured in situations like this,” adds Mr Rowley.
“If it was my children I would have told them to ‘bog off, you got yourself into this mess’. But these scenarios are the unintended consequences of the freedoms.”
Mr Richards says it is “understandable” that some people will instinctively want to help their children.
“But there could be decisions made in emotional haste and regretted at emotional leisure, especially as the retiree may unwittingly be excluding themselves from future state supplementary benefits or care home support under the self deprivation of assets rules,” he adds.
Pension stripping makes divorces messy
The pension freedoms have also opened up a new avenue for bitter spouses to ruin each other financially.
Pensions are considered assets which are taken into account by a court in a divorce settlement.
The court can order that a pension is shared, so that a proportion of the value of the member’s pension fund is transferred to the former spouse or civil partner. Other types of orders may require a lump sum or regular payments to be paid to a former spouse, once the member reaches a certain age, for example 65.
But the new freedom to take defined contribution savings as a lump sum — or series of lump sums — from the age of 55 has increased the scope for scheming spouses to strip the pension — well ahead of any formal court order.
Legal experts report a recent case of a husband taking a lump sum from his pension — while a pension split was in the process of being arranged — in an attempt to reduce his soon-to-be former wife’s share.
“When you look at the divorce arena, emotions are extremely raw in a lot of cases,” explains Nick White, head of the in-house forensic accountancy with Marilyn Stowe, a specialist family law firm.
“It is not uncommon for one party to say ‘I would rather spend the money on lawyer’s fees, or pay taxes or give it away, than give it to the ex’. People get emotionally charged and this drives their decisions.”
Mr White says that pension-sharing orders can give legal protection to the pension assets for couples who are breaking up.
But ahead of a court order coming into force, there is little a spouse — if ignorant — can do to stop their partner from accessing their pension savings.
“The pension freedoms have given spouses more scope to prejudice their partner’s future claim — the reforms have given them another avenue to explore,” says Mr White.
Spouses in the dark over pension transfers
Another situation which has started to trouble trustees is cropping up around requests for final salary transfers involving couples who are not at war.
Currently, members of defined benefit pension schemes cannot make the most of the new pension freedoms. They must transfer their fund to a personal pension to access the savings flexibly. It is not typically in the members’ best interests to give up a DB pension, which is index-linked and will continue to pay a secure income to a spouse after death of the member.
But the pension freedoms have made it attractive to do this for some, who want the flexibility of a lump sum, which could potentially pass tax free to heirs.
There are safeguards in place to prevent members of these schemes who have benefits with transfer values of £30,000 or more from doing this, without having first obtained independent financial advice.
However, there is currently no requirement for a spouse or civil partner — who could benefit from the future spousal pension — to also be notified or involved in the advice. Yet, once the pension has been transferred, any right to a survivor’s pension would also be extinguished.
Anna Rogers, a senior partner with Arc, a firm of pension lawyers, says that trustees are now concerned about future claims from spouses who were left in the dark about the transfer.
“It is not just the elderly who are vulnerable,” explains Ms Rogers.
“The government has given members freedoms but it is also means the freedom to make some poor decisions. Trustees are in very difficult position because they don’t want members to make poor decisions.”
Ms Rogers says some trustee boards are now planning to ask for spouse’s consent before they will agree to a transfer request.
“This consent will say that I understand what my partner is trying to do with the money and will need to be witnessed by a solicitor,” explains Ms Rogers.
‘Russian cocktail waitress test’
The changes are creating new ethical dilemmas for financial advisers confronted with clients who have new power to change their retirement objectives radically.
Mike Morrison, a pension industry veteran, spends much time speaking to advisers about the new issues they face, most prominently from male clients in their late fifties who might be secretly planning to leave their wife and want help cashing in their pensions.
“I have a scenario I put to advisers and it’s called the ‘Russian cocktail waitress test’,” says Mr Morrison.
“I ask what would you do if your client wanted to cash in their pension for a much younger waitress he has just met.”
Mr Morrison says that many advisers say they would refuse to act on ethical grounds, particularly if the wife was also a client. But he says that some advisers have said “they would give the client a good talking to but go ahead with it”.
“The pension freedoms are undoubtedly a progressive development — giving people choice and control over how they access their retirement savings,” says Mr Morrison.
“But there are ethical issues now for advisers. Who are we to question how people want to spend their money, but a wrong decision can lead to a poor outcome for the people involved.”
Behind closed doors
Policymakers are urged to be alert to cases of financial abuse of vulnerable over-55s and their spouses, flowing from new pension freedoms. Since the reforms came into force in April, much attention has been placed on the risks that pensioners — who now have access to large pension lump sums — face from scams and fraudsters.
But there has been less focus on the pressures that vulnerable over-55s may face behind closed doors in their family homes to cash in their pensions.
“Financial abuse of parents is one of the concerns we have about the pension freedoms,” said Jane Vass, head of public policy with Age UK, which campaigns on issues for the aged. “It is subtle. I think most parents would find it difficult to say no to a child who needed help to pay a student loan or help with a home loan deposit.”
Duncan Buchanan, president of the Society of Pension Professionals, the industry body, added: “The government needs to be alert to these cases which are surfacing, because retirement savings are meant for retirement.”
Under current regulation, spouses do not have to be asked for their consent if their other half requests a defined benefit transfer, though such a transfer will result in them losing a right to a secure survivor’s pension in future.
Jane Cowley, partner with Howes Percival, a legal firm, says there is legal recourse for spouses who have been deliberately deprived of a share of a pension asset by their spouse before a divorce. But this would require the wronged spouse to initiate legal proceedings against their ex.
The government says it is taking steps better to protect divorcees from the risks of their ex-partner depriving them of future pension income. It recently announced plans for a new duty on schemes to notify former spouses or civil partners if their ex is seeking to access a pension. But this additional safeguard will only apply to a minority of pensions with “attachment orders”.
The FT brought these issues to the attention of the Treasury this week, and asked whether stronger safeguards were needed.
“To help people make informed decisions about their pension freedoms, the government set up the free and impartial Pension Wise guidance service,” the Treasury said. “As a first step, anyone looking to find out more should contact Pension Wise. We also continue to work with industry and regulators to ensure consumers are protected.”