Understanding the different ways you can use your pension money.
The UK has seen a rise in the number of people accessing
their pension pots or enquiring about doing so. People accessing their pension
as a flexible income has increased by 56% [1] according to research since the
first lockdown last year. The increase is due to people withdrawing after
holding off when stock markets were volatile.
An increasing number of pension savers have started to
withdraw funds after many pressed pause at the start of the coronavirus (COVID-19)
pandemic. The number of people taking only a tax-free lump sum has increased by
55%. Worryingly, the number of people withdrawing all of their pension in one
lump sum increased by 94%.
Complex tax rules around pension withdrawals
Once you reach age 55 you can now access your pension pot.
You can take some or all of it, to use as you need, or leave it so that it has
the potential to continue to grow. In September last year the Government
confirmed it would legislate to enact proposals to increase the minimum access
age from 55 to 57 in 2028[2].
Due to COVID-19, many people’s incomes have been
significantly reduced and so taking money out of their pension pot seemed like
a quick cashflow solution. But there are complex tax rules around pension
withdrawals so people should be aware of the potential consequences.
Needing money after a change in circumstances
While a tax-free lump sum can be withdrawn from a pension
without incurring any tax liability, any balance withdrawn is subject to income
tax. The number of people buying a guaranteed income for life (annuity)
increased by 41%.
The increase in withdrawals is due to a combination of
factors, including some people returning to withdraw after pausing earlier last
year due to stock market volatility and some people needing the money after a
change in circumstances.
Factors weighing on pension savers’ minds
Data from August and September last year showed withdrawal
levels got closer to levels seen in 2019 but many pension savers still resisted
the urge to access their pension pots in the face of continued financial
uncertainty. When you take your pension, some will be tax-free but the rest
will be taxed. You need to be aware that tax depends on your circumstances, which
can change in the future.
Stock market volatility, coronavirus (COVID-19) and
employment prospects are just some of the factors weighing on pension savers’
minds when considering taking money out of their pension pot. Everyone is
different and it is important to find the right solution for your
circumstances.
Top 5 things to consider before withdrawing money from
your pension
1. Pensions freedoms: Familiarise yourself with the
pensions freedoms so you are aware of your options. You can now do a lot more
with your pension pot than previously. Everyone is different and it is
important to find the right solution for your circumstances. What risks are you
willing to take?
2. Saving requirements: Consider the amount of money
you will need each month to maintain your lifestyle. Ask yourself: How much
might I need? How much might I get? Do I still have a mortgage to pay off? What
other sources of income do I have, and do I need my pension to keep up with inflation?
Could I consider working for longer? Do I want to have annual holidays?
3. Costs later in retirement: Think about costs later
in your retirement. What will your living costs be in the future? Care needs
are not a subject we are comfortable thinking about but it is important to have
conversations about it with your family, as well as Powers of Attorney, Wills
and inheritance.
4. Health and life expectancy: We often vastly underestimate
this, but evidence shows we are mostly living longer, with a growing variation
in healthy life expectancy. If you have a partner, do you need to provide for
them financially after you die, or are you relying on them?
5. Time to talk to us? Few of us may expect to give up
work altogether in our 50s. But a growing number of us are dipping into our
pension before retirement age. Before we get into the different ways you could withdraw
money, there’s some more general things to think about first. Try asking
yourself the following questions: How long will I need my money to last? How
long do I want to keep working? How much tax might I pay? Could my health and
lifestyle affect what I get? How much do I want to leave behind?
Guidance to enable you to make an informed decision
Whether you have plans to retire completely or want to scale
down your work hours, there are now more options than ever to choose from when
thinking about making your savings work for you. If you are considering
accessing your pension it is essential that you receive professional financial
guidance to enable you to make an informed decision. If you get it wrong you
could end up with a large tax bill. To discuss your situation — please get in touch.
Source data:
[1] https://www.abi.org.uk/news/newsarticles/2020/11/big-jump-in-pension-savers-accessingpots-after-pressing-pause-in-the-first-lockdown/
[2] https://questions-statements.parliament.uk/written-questions/detail/2020-08-28/81494
THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED
ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION WHICH ARE SUBJECT
TO CHANGE IN THE FUTURE.
ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF
RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS
NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT
RETIREMENT.