Thousands of consumers in Scotland go bust despite "protection" - GLC's Personal Insolvency Law Unit report

Many consumers in Scotland enter into personal insolvency solutions believing that they will resolve their financial difficulties and secure much needed light at the end of a dark tunnel of unmanageable debt.

The aim is to take back control, repay debts as best as possible, and provide financial rehabilitation and a fresh start for those who have generally been through life crises. In many cases insolvency solutions work reasonably well, but there are far too many cases where things go horribly wrong. In our experience, both consumers and creditors lose out.

Govan Law Centre (GLC) was concerned with the high incidence of poor outcomes for extremely vulnerable consumers, which is why we appointed Alan McIntosh to head up the first ever pilot Personal Insolvency Law Unit in Scotland. The project has so far been self-funded by GLC on a pilot basis in order to properly assess the scope, and need, for a dedicated and free specialist service in Scotland.

Our Personal Insolvency Law Unit Unit has been ingathering evidence from casework in Scotland since the summer, and today we publish our interim findings. You can download our report here (opens as PDF).  We provide evidence of widespread mis-selling of protected trust deeds across Scotland. A failure of regulation in Scotland's personal insolvency market which is costing Scottish consumers millions of pounds for virtually no real service.

Our report, written by the Unit’s Project Manager, provides compelling evidence that there is an overwhelming need for a dedicated free specialist service; a service that can provide both second tier support to front line advice agencies but also undertake complex and contentious casework for consumers.  Our report evidences a number of important market and systemic failures, including a high level of failed protected trust deeds and the failure to protect a consumer’s home from repossession. 

We agree with today's editorial in The Herald. The Scottish Government needs to reconsider protection for debtor's homes, and review the licensing and regulatory framework for those who sell trust deeds in Scotland. This is a devolved matter.
  
A protected trust deed failure rate of 9 out of 10 must send alarm bells ringing to members of the Scottish Government and Scottish Parliament. As The Herald says, the evidence is "disturbing". Behind the statistics are human tragedies. Insolvency can and does happen to anyone.  The prospect of paying thousands of pounds for a service that all to often is doing nothing to help either consumer or creditors in Scotland is unacceptable.

Read further coverage of this story in The Herald here.

Thousands of consumers in Scotland go bust despite "protection" - GLC's Personal Insolvency Law Unit report

Pension reforms: liberation or freedom to lose your pension pot?!

From April 6th anyone aged 55 or over will be able to access all of their pension savings as a cash lump sum if it is in a 'Defined Contribution' scheme (as opposed to 'Defined Benefit' scheme which promises a specific income/salary). 

This lump sum is money you've been saving in your pension pot over many years, if not decades, and it has generally been paid in 'tax free'. In other words, the income tax normally deducted from your salary and employers contributions has been paid into the pot too.

This is because it has been a long standing policy of all UK Governments to encourage and help people make provision for their retirement and later life.

The UK Government has been promoting next month's changes to UK pension law as 'the pensions freedom revolution'.  Yet, empowerment to access all of your pension pot from 6 April 2015 might also be seen as freedom to lose your money or get ripped off.

What has not been publicised with equal vigour and prominence is that if you 'cash-in' your pension fund next month you can only take 25% of it tax free.  The other 75% is taxed at your marginal rate. Let's look at an illustration.

Example at 6 April 2015
So you currently pay 20% tax - and let say you earn £24,000 per annum - and you cash-in a pension pot worth £50,000. You can obtain £12,500 tax free.

The balance of £37,500 is treated as your income during the 2015/16 tax year. So your earnings are now £61,500. In relation to the balance of your pension pot you are liable to pay 20% rate tax on the first £7,785, and 40% tax on £29,715 of that balance. Your extra tax bill is £13,443.

To think of it another way - you had a pension pot worth £50,000, but cashing in all of it at once next month (instead of taking a quarter of it tax free) means you lose almost £15,000 in tax!

So you need to think very cautiously and extremely carefully whether you should 'liberate' all of your life savings. 

People often underestimate how long they live for, and making the wrong decision now could not only be expensive, but could prove detrimental in later life.  You can obtain free online guidance from the UK Government's Pension Wise online service and the Money Advice Service.

Two further issues are worth mentioning. First, whatever you do don't get scammed. If something sounds to good to be true, it usually isn't true. So don't get ripped off. The Financial Conduct Authority (FCA) also has good information on pension scams.  If in doubt take independent financial advice from an advisor regulated by the Financial Conduct Authority.

We also post below a helpful '60 seconds' tips on pension law changes from personal finance broadcaster and writer Fergus Muirhead.

Second, the law remains unsatisfactory and unclear as regards the ability of a trustee in bankruptcy to access a Defined Contributions pension fund. There are conflicting English High Court decisions, for example the cases of Raithatha v Williamson [2012] EWHC 909 (Ch), and Horton v Henry [2014] EWHC 4209 (Ch).

Govan Law Centre believes the position should be place beyond doubt: trustees in bankruptcy should not be able to access an uncrystallised pension fund (in other words a pension which is still locked and not accessed by the debtor).  The law should be clarified by the UK Government and Scottish Government (where bankruptcy is devolved).

Disclaimer: this blog provides information only and does not represent legal or financial advice. You should always obtain your own independent and regulated legal or financial advice from a solicitor or qualified independent financial advisor.

Pension reforms: liberation or freedom to lose your pension pot?!