PENSION TRAP – DON’T GET CAUGHT

Saving pots for emergencies provide an important buffer for when times get tough. But many without adequate nest eggs have been forced to raid their pension savings either to bolster their own income or to help family over the last 18 months.

A total of 1.4 million people cashed in £9.4billion throughout 2020 under the financial strain caused by lockdowns, according to official figures[1].

While the pension freedoms, introduced in 2015, allow savers to access every penny of their retirement savings, there are important consequences of drawing on that money. Once you have dipped into your pot, the amount of money you can pay into it -and claim tax relief on- reduces.

That’s because withdrawing income (over and above the 25% tax-free lump sum) usually triggers the Money Purchase Annual Allowance (MPAA), which reduces the amount you can pay in with tax relief by 90% from £40,000 to just £4,000.

Once you’ve triggered the allowance you can’t go back to putting a higher amount in. It’s irreversible.

When the MPAA is applied you also lose the ability to carry forward up to three years of unused allowances in the current tax year.

This sting in the tail could severely limit the amount you’re able to save for the future.

New research[2] from Canada Life has shown that nearly one in ten of over 55s have accessed their pensions while on furlough to help make ends meet. Many over 55s have flexibly accessed their pensions, with 7% using both their tax-free cash and drawing down additional sums.

However, two fifths of people were unaware of the restrictions on the amount they can continue to contribute to their pension pot.

Worryingly, 40% are aware of the restriction but are uncertain about the detail. Many overestimated the allowance as almost £7,000 a year – almost double the real MPAA limitation of £4,000.

Consulting a financial adviser before accessing pension savings early is the smart move as you could struggle to get retirement plans back on track with the lower limit in play.

Yet many of those who dip into their pension fail to take advice.

Anyone who has started taking money from a private pension –whether it be a one-off lump sum withdrawal or a regular monthly amount – must first convert their pension into an income drawdown account. Drawdown allows you to take out what you need, and leave the rest invested in the stock market.

Worryingly, an estimated 100,000 drawdown plans are taken out each year without the guidance of a financial adviser[3].

This is significant because an adviser would be able to flag up the pitfalls and important tax consequences.

It’s not just the MPAA you need to be aware of. You can also be hit with a large tax bill when withdrawing money from your pension. After the 25% that you are allowed to take tax-free, any amount withdrawn is taxed at your normal income tax rate.

Raiding a pension could also impact future benefit claims, for example support with council tax or affect universal credit claims.

An adviser can also, crucially, assist with ways in which you can take money out of your pension without triggering the MPAA.

There have been a number of campaigns among pension providers urging the Government to scrap the MPAA. However, this is not to be relied upon.

Source:

[1] https://www.gov.uk/government/statistics/flexible-payments-from-pensions#history 

[2] https://www.canadalife.co.uk/news/nearly-half-of-furloughed-workers-make-changes-to-their-retirement-plans/ 

[3] https://www.fca.org.uk/news/press-releases/fca-proposes-rules-investment-pathways-and-other-measures-improve-retirement-outcome%20s-consumers 

PENSION AGE INCREASE

It is important to save for the future and to engage with retirement provisions. However, there are many more things to be aware of when it comes to pensions, than simply saving as much as you can afford to.

It’s just as important to keep track of the ever-shifting pension rules. The pension freedoms introduced in 2014 allowed individuals unlimited access to every penny of their retirement savings, for the first time.

While restrictions on how much could be withdrawn from a pension fund were removed, rules remained on when you can start taking money out. A ‘normal minimum pension age’ is set by the government to ensure that pension savings are used as intended – for retirement.

At the moment the age where you can access your pension savings is 55. But from 2028 it will rise to 57. The increase is in response to the fact that most people continue working and saving beyond this age and reflects increases in the state pension age (more on this later).

For some it means they will need to work for longer than they would have preferred. For others it might mean delaying a dream holiday or perhaps helping out younger family members.

Awareness, it seems, is an issue.

A recent study[1] has highlighted a significant lack of awareness with 7 in 10 adults (68%) said they did not know of the rule change. Awareness was even less amongst younger age groups with 83% of 18-34 year-olds oblivious to it. The rule change is not completely cut and dry, however. There are some exceptions.

Some pension schemes have it written into their rules that savers can access their pensions from 55, and this will apply even after 2028.

Savers can also keep the right to withdraw their savings at 55 if they transfer to a scheme that has the lower age stated in its rules by April 5, 2023. This will help to avoid having pension schemes with one set of rules for some savers and a second set of rules with a different retirement age for others.

The rule change on when you can access your pension will not apply to members of the police,armed forces and firefighters who will be allowed to keep their lower minimum pension ages. Firefighters, for example, are allowed to take their pension at 50 with 25 years’ service. The state pension age is the same whatever your job.

What’s important to remember, is that protecting the age at which you can reach your pension isn’t always the priority, depending on the individual circumstances.

Some 44% of adults aged 35-54, the first age group who’ll be hit by the proposed changes, admitted that they would be put off transferring to a better value scheme if doing so meant they lost their right to take their pension from age 55.

But moving to a new scheme could boost returns if it came with lower charges and better investment options.

Getting the right advice is crucial to ensuring your savings are in the best place for your own personal circumstances. A financial adviser can not only help you invest money wisely for the future, but also to plan ahead for known changes.

And remember, it’s not just private pensions that are getting further away. The State pension age is also on the rise. Since 6th October 2020, the State Pension age became 66 for men and women in the UK. A further increase to age 67 is due to take place between 2026 and 2028. This will be phased in.

You can check your State Pension age online (https://www.gov.uk/state-pension-age) and even obtain a forecast of your State Pension entitlement (https://www.gov.uk/check-state-pension).

Source:

[1] Aegon Study, July 2021

COP26 SUMMIT –

THE LOWDOWN

The COP26 summit which took place in Glasgow this month addressed how we can all live more sustainably to limit global warming.

During the 13-day conference, speakers laid bare the issues surrounding climate change and aimed to thrash out the way to get to net-zero – in other words, not adding to the amount of greenhouse gases in the atmosphere.

Progress was made with over 100 countries signing a pledge to reduce methane emissions by 30% by 2030 from 2020 levels[1]. India made the first commitment to net zero, albeit not until 2070[2].

Deforestation was also a hot topic. More than 100 countries, covering over 85% of the world’s forests, made the commitment to halt deforestation by 2030[3].

Guidelines for a global carbon market were approved to bring standardisation and clarity; a development that has been hanging in the balance since COP21 in Paris.

It was also noted by commentators that the US and China appear to be trying to work together on climate issues, despite geopolitical tensions.

While countries will have to regularly update their emission reduction targets and strategies, commentators maintain that the commitments made to date are not enough to achieve all the essential climate goals. And all the while emissions will keep rising in the shorter term.

COP26 and investment

In one of the many discussions that took place during the summit, financial services figures highlighted the role that public and private investment can play in decarbonising the economy, which has raised the profile of investing with an environmental, social, and governance (ESG) mindset.

ESG investing is where the focus is on backing companies with strong credentials when it comes to environmental, social and governance matters.

There are businesses all over the world that are dedicated to the environment by developing cleaner energy, sustainable transport as well as reducing plastic waste.

It’s not just about improving the planet with ESG investing. Under the social part, the focus is on a company’s treatment of staff and suppliers, and to what extent it upholds labour and human rights. Governance relates to issues include ensuring fair leadership of the business, matters of executive pay and its stance on shareholder rights.

During COP26 discussions, experts sought to highlight the importance of driving positive change. When individuals place their savings into an investment fund, its manager becomes a significant shareholder.

This gives them clout to steer firms to behaving more responsibly towards ESG matters.

Asset management firms take part in hundreds, if not thousands of what they call “engagements” each year to encourage, recommend or insist that improvements are made. This could be to ramp up on climate policies and practice or cutting emissions in a business.

Interested in investing for good? 

The jargon and high-level debate at COP26 can make sustainable investing seem like a daunting prospect.

Yet it can be pretty straightforward. Many people are already investing for good. The amount of money pouring into responsible investments totalled almost £1billion a month on average in 2020[4]. 

Source:

[1] https://ec.europa.eu/commission/presscorner/detail/en/statement_21_5766

[2] https://www.bbc.com/news/world-asia-india-59125143 

[3] https://www.gov.uk/government/news/over-100-leaders-make-landmark-pledge-to-end-deforestation-at-cop26

[4] https://www.theia.org/media/press-releases/responsible-investment-funds-under-management-66-over-12-months#