Coronavirus: Martin Lewis advises on pension savings
Pension withdrawals are available to those over 55 following the implementation of pension freedoms legislation a number of years ago. While the freedom to do as one should so choose with a pension can be liberating, it is also sensible to take caution on the matter. But recent data has shown an uptick in pension withdrawals, which can bring about a certain level of risk for those who choose to do so.
Figures from HMRC revealed a savings exodus, showing many have decided to make withdrawals from their pension.
Some 360,00 people decided to withdraw from a defined contribution pension throughout October, November and December 2020.
This is a 10 percent increase on the same period last year, and a four percent rise compared to the previous three months.
The organisation WEALTH at work has expressed concern about these figures, as this is not the usual season pattern when it comes to pensions.
In fact, typically there is a slight drop in the number of people who decide to withdraw from pension savings during this period.
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It is thought, and HMRC has also expressed, the change may be a result of the pandemic.
However, while finances are likely to be hard-pressed, withdrawing from a pension can have disastrous consequences if not done properly.
As pension pots provide important income for retirement, withdrawing from savings could mean someone ‘outlives’ their pension, that is to say, running out of money in retirement.
Jonathan Watts-Lay, Director at WEALTH at work, commented on the matter.
He said: “It can be really tempting for those aged over 55 to access their defined contribution pension early if they have an urgent need for cash due to redundancy or a reduction in their income.
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“However there are significant risks if you take money out of your pension without seeking appropriate financial guidance first.
“One of the main things is to make sure that you don’t end up paying more tax than you were expecting.
“Usually only the first 25 percent of a pension is tax free; the remaining 75 percent is taxed as earned income.
“If the amount withdrawn jumps up up int the higher rate tax bracket, you could end up paying tax of 40 percent, instead of the 20 percent you may have been expecting to pay.”
While paying extra tax is evidently an issue many people will wish to avoid, there are other considerations to take into account.
These include finances more widely, and also encompass rules surrounding withdrawals which some may be totally unaware of.
Mr Watts-Lay continued: “Also, and perhaps more importantly, whilst you may really need the cash at the moment, you will also need money in your retirement.
“There are limits on how much can be paid into a pension after a withdrawal has been made, making it more difficult if you want to try to replace the money withdrawn in the future.
“It is important to consider all your options if you are struggling to make ends meet, such as the government-backed mortgage holiday and debt repayment deferrals, or using alternative savings to replace any lost income, and weigh up the best option for you.
“Learning how to budget and manage debt on a reduced income is crucial during these uncertain times.”
For those making a decision on their pension, the task can often be an intimidating one.
It is therefore generally stated Britons should take some level of advice, whether this be from a financial adviser, or through the government’s Pension Wise service.
Experts are likely to be able to provide an in-depth level of insight to help those looking to make decisions on their retirement funds.
But there are also alternative methods of support at hand, as Mr Watts-Lay concluded.
He said: “Many employers now offer access to financial education, guidance and regulated financial advice to their employees, so it is worth speaking to them to find out what help is available.”
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