Pension income is both crucial and fragile. They are designed to provide stable payments for a person’s later years but this doesn’t stop them being affected by short term problems. Coronavirus has created a dilemma for a whole host of financial assets but most will, understandably, be concerned about their retirement outlooks.
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There is plenty of advice on how to manage this period but the insight offered can often focus purely on one area, not taking into account different perspectives.
Thankfully Ian Gutteridge, a Director at Premier, provided plenty of advice for both individuals currently saving for retirement and those already retired.
His first set of advice is aimed towards people who are retired and may feel constrained by limited income and employment options.
The advice here mainly concerned withdrawing funds and the potential ramifications.
You are in retirement and looking to cash in funds to meet expenditure needs
Ian started off by warning against cashing in funds from already struggling assets: “Be careful about cashing in large amounts from investment funds that have suffered losses in recent weeks.
“Believe it or not, some individuals use the start of the tax year to withdraw funds from their pension to meet future income needs.
“Sadly, the timing in the current market is not great. If cash is required, can you:
- “Take it from any cash funds that may exist within your Drawdown pension pot, rather than investment funds designed to achieve medium term capital growth?
- “Take it from other forms of investment, such as personal savings?”
Some people may not even have the ability to make withdrawals and for people in this position, Ian calls for a certain degree of patience: “If there is no option but to withdraw funds from your investment funds within your Drawdown pension plan, look to make smaller withdrawals, perhaps to tide you over for a couple of months and then look to review the position in June 2020.”
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You are in retirement and want to change the shape and nature of income generated from your Drawdown pension plan
It’s a common trait in humans that when negativity strikes, we must react to counteract it.
In light of this, some retirees may want to alter how they manage their drawdown affairs but Ian highlights that extra income may not even be necessary in the current environment: “It might sound obvious to re-do a budget planner; but in the current climate, income needs may have reduced.
“With Covid-19 ‘lockdown’, we cannot do the things we previously took for granted. We travel less and we spend less on socialising. We may actually have lower income needs.”
While pension problems may be primarily an issue for the retired (or those approaching retirement) there are still many things that can concern those still working.
Ian’s following tips concern those who are pension savers who may be tempted to dip into their pensions early or alter their contributions.
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You are still working and saving into pensions, but you’re thinking of cashing-in part of your pension savings
Ian continued: “Employees who are still saving into a pension scheme, might be tempted to cash in an old pension or part of their current pension arrangement.
Under Pension Freedoms introduced in April 2015, there is an encashment option called an Uncrystallised Funds Pension Lump Sum (UFPLS), which allows a pension saver to cash-in their pension in return for a lump sum.
“25 percent of the fund is tax free and the balance is subject to income tax. A pension fund of £10,000 would provide a lump sum of £8,500 to a basic rate tax payer.
“However, encashing a pension under UFPLS rules immediately triggers the Money Purchase Annual Allowance (MPAA). This restricts all future pension savings (whether these come from an employer or from the individual) to just £4,000 a year.
“If future savings are greater than £4,000 it is likely the pension saver will pay income tax on the excess savings over this amount. As a result, savers have to be very careful when cashing-in pensions.”
His final tips concern a tragic predicament; savers and workers who wish to contribute to a scheme but under the circumstances simply can’t.
You are contributing into a scheme, but money is tight and you need to reduce costs
Ian touches on the country’s less than stellar record for saving for the long term: “UK plc still has a long term saving problem and we should always try to maintain an adequate level of pension savings. However, if personal cash flow is tight, modern day pension plans will usually allow contributions to be reduced or even stopped, without penalty.
“If you save into your employer’s Workplace Pension Scheme, check with your HR Department whether you can reduce contributions. You may already be paying the minimum amount and there may be special rules if you reduce contributions further.
“If you save into your own personal pension plan, check with the provider that contributions can be reduced or even stopped without penalty and that you can restart contribution into the existing plan without any additional costs.”
In a concluding remark, Ian warned that any decision made should be thoroughly considered before action is taken: “Don’t take the decision lightly though, as the benefits of long-term saving and compounding interest and growth should not be underestimated – and contributions should only be reduced if really needed.”
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