Published On: Fri, May 1st, 2020

Pension: Things to consider when taking pension amid coronavirus crisis | Personal Finance | Finance

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Pension freedoms were introduced in 2015, with the greater flexibility giving people more options when it comes to their pension – both in terms of how they access their pension savings and when they do so. However, following this, Laura Laidlaw, Head of Customer Communications at Standard Life, has addressed some things which people nearing retiremment may want to be mindful of.

Following the change five years ago, anyone aged 55 and over with a defined contribution pension now has complete access to their pension pot and there is no restriction upon how much they can withdraw – although there may be tax implications with this approach.

No doubt a significant shake-up for many, the greater freedom is also said to come with greater responsibility.

In the current economic climate, some people who are over the age of 55 may be considering dipping into their pension savings if they are currently experiencing a reduction in their earnings as a result of COVID-19.

But they might want to think twice before taking from their pension and the expression “just because you can, doesn’t mean you should” may ring true, Standard Life is warning.

Speaking to Express.co.uk, Ms Laidlaw has issued a reminder of what people may want to take into consideration when it comes to accessing their pension pot early.

READ MORE: What age do you get your state pension?

Remember your pension pot has to last you throughout retirement

“First things first, it is essential that you carefully consider your plans for retirement to ensure your pot of money will cover everything you need it to,” she said.

“Taking too much too soon could put you at risk of running out of money – potentially when you need it most, in later life.

“To establish if you will have enough to fund your retirement, it’s a good idea to start by estimating your annual cost of living. Of course, future expenses are hard to predict but to get a ballpark figure take your current standard of living and then subtract any expenses you expect to no longer have and add in any new ones.”

Ms Laidlaw signposts to the Retirement Living Standards, something which were published by the Pensions and Lifetime Savings Assocation (PLSA) last year.

These standards were intended to help people to build up a picture of how much everyday living and some luxuries cost, so they could work out how much money they’ll need for the retirement lifestyle they want.

And, while workplace or private pension savings may make up a significant part of one’s retirement planning, upon reaching state pension age, they may also be able to claim this form of income.

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“You may also be eligible for the state pension, which is separate from workplace or a private pension,” Ms Laidlaw pointed out.

Do you have other savings you can draw on?

For those looking to take their pension, Ms Laidlaw suggested taking a wider look at one’s finances and thus their financial options first.

She said: “Make sure you understand all of your options and look at all of your savings before deciding how to use the money.

“Taking an income from your pension might not be your only option. If you have a rainy-day fund it may make sense to use this now rather than your pension savings.

“Many people may also have ISA savings from which they can take a tax-free income. You could consider taking money from ISA savings instead of, or along with, a reduced income from your pension.”

Taking your pension and the impact on investments and returns

“Covid-19 has unsurprisingly hit investment returns and even though history shows us markets tend to recover eventually, the less you take from your pension now the better.

“Withdrawing funds from your pension savings when the markets have fallen will mean there are less funds in your pot to benefit from any market recovery.

Taking money from your pension now could restrict how much you can contribute in the future

“If your circumstances mean that you do need to access your pension savings there may be scope to pay more into your pension once the pandemic has subsided and things return to normal.

“Pension freedoms certainly gives you that option but it’s worth remembering if you take income from your pension over and above your tax-free cash limit of 25 percent, this will restrict the payments you or an employer can make into your pension in the future. Your contributions in this instance would be restricted to £4,000 a year.”

What about just taking tax-free cash?

Ms Laidlaw explained: “A quarter of your pension pot is usually tax-free. You can decide how and when you take your tax free cash. This can be in one go, or you can spread it over a longer period if you want.

“So if you are over 55 and know you will be going back to work you may decide to use tax free cash – perhaps along with some other savings – to give yourself an income in the current situation.

“By ensuring you don’t take more than the tax free cash limit, you won’t compromise the level of future contributions into your pension – up to £40,000 each year if you have the earnings to do so.”

Those who are uncertain about what to do, could look into getting professional advice, Ms Laidlaw added.

She said: “If you are not sure what’s right for you, seek professional advice to understand the ins and outs of taking from your pension pot. If your pension provider knows what your plans are, they can also help you by providing relevant information and help to understand your options.

“There is also a lot of information and resources available online. Both, the Pensions Advisory Service and Pension Wise are useful sources of impartial guidance and support.”

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