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Pension withdrawal activity has shot up over the last year or so as the impacts of coronavirus force millions to upend their retirement plans. Many people are taking their pension pots in their entirety but warnings have emerged detailing this may not be a wise idea.
Ian Browne, a retirement planning expert at Quilter, commented on the newly released figures from the ABI: “Crucial decisions like this need to be taken carefully, ideally with the help of a financial adviser.
“Drawing on savings is going to be necessary for a lot of people, and for those over the age of 55 it is an entirely valid option, but it is important they are fully aware of the long-term implications it may have on their financial plan.”
He went on to highlight what some of these long-term implications may be: “Firstly, while some people find security in the familiarity of cash in the bank, taking your entire pension pot in one go is unlikely to be a sensible move.
“For almost everyone, it will be more tax efficient to take any income you require gradually, rather than paying unnecessary levels of income tax.
“The number of people fully encashing their pension in one go has been a concern since pension freedoms were introduced, and the current climate of uncertainty could exacerbate the situation.
“If you do choose to take income flexibly now, be aware that this could also limit your ability to save again in the future.
“The Money Purchase Annual Allowance (MPAA) will cap future contributions at just £4,000 per year, rather than the normal £40,000.
“So if you take income now but then later return to work, you might not be able to make full pension contributions.
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Ian went on to call on Rishi Sunak to make changes to MPAA rules: “There is a risk of a scarring effect on people’s savings, caused by them being forced to tap into their retirement pot early, but then also being prevented them from recovering that funding gap when their finances are in better shape.
“We believe the Chancellor should relax the MPAA triggers for at least the current tax year in order to avoid this double-whammy for people forced to use pension cash in the crisis.”
It should be noted the MPAA will not be triggered in all withdrawal circumstances.
Those who leave certain elements of their pensions untouched may be spared tax repercussions.
According to the Money Advice Service, the MPAA won’t normally be triggered if:
- A retiree takes a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases
- they take a tax-free cash lump sum and put their pension pot into a flexi-access drawdown scheme but don’t take any income from it
- they cash in small pension pots valued at less than £10,000
Ian concluded his analysis by detailing what people should do before accessing their pensions to minimise negative effects: “Everyone should think about speaking to Pension Wise as a minimum before accessing their pension pot.
“Even those with a high degree of confidence in their own financial capability could benefit from some impartial input, and the service is entirely free to use.
“This should be considered the bare minimum, and for most people we would recommend speaking to a qualified financial adviser.
“They can help you get a handle on your long-term retirement finances and make sure you have a stable plan for the future.
“Knowing exactly where you stand financially and having an expert on your side will provide peace of mind and comfort that you’ve got a clear plan about how to pay for retirement, even if the route you take does need to change and adapt over time.”
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