Pension warning: Lockdown has forced ‘all-or-nothing’ retirement plans – guidance issued

Budget 2021: Sunak announces pension lifetime allowance freeze

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Pension plans have been placed into doubt due to the impacts of coronavirus new research shows. Analysis from Hargreaves Lansdown (HL) showed the crisis has forced people to engage with “all-or-nothing retirement plans”.

HL surveyed 2,000 people in October 2018, 2019 and 2020 and the data from these efforts revealed:

  • Before the crisis, almost one in three people said they didn’t know what they wanted to do between the ages of 50 and retirement (30 percent). That has fallen to one in four (24 percent).
  • The number of people who said they wanted to give up work between the age of 50 and state pension age has more than doubled from four percent to 10 percent.
  • The number who said they wanted to work part-time was the same as a year earlier.
  • The number of people who said they wanted to carry on working full time increased at twice its previous rate – from 38 percent to 42 percent.
  • Since the onset of the pandemic, men are more likely to say they want to start a business in their last decades at work, but fewer women want to go it alone.

Sarah Coles, a personal finance analyst at HL, commented on these findings: “The pandemic has forced us to make tough decisions about retirement, and while a fifth of people still plan to gradually ease out of the workplace, it has fuelled a rise in all-or-nothing retirement plans.

“Men in particular have cemented their retirement plans, with the number saying they don’t know what they want to do falling by a third over the year, from 30 percent to 20 percent.

“The crisis prompted more of us to reassess our priorities and make crucial decisions about how we want to work in our 50s and 60s.

“For some people, it has opened their eyes to the compromises their working life has forced on them, so they’re keen to leave it all behind as soon as possible.

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“There has been a huge rise in women who want to stop work altogether, trebling from just four percent the previous year to 12 percent after they had felt the effects of the pandemic.

“For others, more time at home with their loved ones has reminded them how much they enjoy being out at work. Both women and men are more likely to say they want to work full time up to state pension age now.

“In a huge number of cases, the decision has been underpinned by financial considerations. Big falls in income during the pandemic has forced some people to put less away for the future, or even to start eating into it, which means working full time for longer.

“And for others, there has been far less control over the decision. The pandemic has forced many older people out of work altogether. The FCA found that almost three in five (58 percent) people who retired between March and October 2020 did so because of covid-19.

“While the figures show how quickly our plans can change, they underpin how important it is to make decisions about your retirement early on so that you have enough time to prepare. “Stashing cash in your pension pot when you’re in your 30s or 40s will help ensure you do have choices about when you can retire and just how much work you want to do into your 60s and 70s.”

These issues could be made worse by oncoming pension tax changes.

Analysis from Just Group, the retirment specialist, detailed a freeze in the Money Purchase Annual Allowance (MPAA) along with changing tax thresholds is set to increase the number of basic rate taxpayers aged 55+ who have taken a taxable payment from a defined contribution pension facing a squeeze on tax relief on their future pension contributions.

It explained: “The freeze in the MPAA at £4,000 combined with new tax thresholds for 2020-21 shows how more employees, even those contributing the minimum 8 percent of salary to a workplace pension, could start to feel the squeeze due to pension contributions that exceed the allowance.

“In 2020-21, the marginal rate of income tax was 20 percent on earnings up to £50,000 and someone earning that amount making an 8 percent pension input would be within the £4,000 MPAA limit.

“For 2021-22, the 20 percent tax threshold is £50,270 and someone earning that amount making the 8 percent contribution would have an input of £4,021, just above the £4,000 limit. The scheme member would face an annual allowance charge on the £21 excess, in effect clawing back tax relief and reducing the tax efficiency of saving into the pension.”

Stephen Lowe, the group communications director at Just Group, commented: “It is not reasonable for policymakers to expect most people to be aware of and understand the complexities and consequences of the rules which impact their ability to keep saving into a pension.

“Nearly four in five pensions accessed by those aged 55+ each year without advice are missing out on the free, independent and impartial guidance they are entitled to from Pension Wise that could help them navigate these complex rules.”

Fortunately, HL concluded by issuing the following guidance on how people can move into retirement in the way that suits them best and can limit negative repercussions:

  • “Decide when and how you want to finish work. Do you want to stop altogether or have a phased retirement, working part-time or starting your own business?
  • “Decide where you will live, whether you plan to remain where you are or downsize?
  • “Decide what you want to do in your retirement, and therefore what kind of income you will need. The Pension and Lifetime Savings Association reckons a couple will need £47,500 a year for a comfortable retirement, but that will depend on your own plans.
  • “Use a pension calculator to work out what kind of lump sum you need to build, and whether you need to change your contributions in order to hit your target.
  • “Think about the things you might want to have in place in the run-up to retirement, such as doing home renovations or buying a new car, which will be more of a stretch on a pension income.”

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