The current Coronavirus pandemic has caused many people to be in a financial bind. In the UK if you’re over 55 and have a defined contribution pension, you can do what’s called “flexible access”. This activity means drawing funds out from your pension for any purpose.
The Association of British Insurers (ABI) has reported that since the first lockdown in April 2020 there was a 56% increase in the number of people accessing their pensions early. While this has been a short-term cashflow solution for many, industry experts worry about the future. The danger lies in the fact that withdrawing too much now leaves little for the (still uncertain) future.
Why are people doing this?
Covid-19 came out of nowhere and impacted everyone worldwide, very quickly. Many people lost their jobs. Those over 50 who found it virtually impossible to be re-employed felt they had no option other than to dip into their pensions.
Finance markets globally took a big hit. Estimates show that a typical pension fund lost value in the first quarter of 2020, around 15%. Some people decided to remove giant portions of these and reinvest them elsewhere, seeking a better return.
The negatives of flexible access
First and foremost, taking out chunks of money now leaves less for the future. There are several implications to this. When the funds run out, that’s it; there’s nothing left. A person aged 55 generally has many years left in them and will need a considerable amount available to sustain an acceptable quality of life.
Stock markets are renowned for their ability to bounce back from adversity. Crashes, downturns, depressions, and even pandemics have seen stocks take drastic falls, which then rise again when things settle. The danger of taking too much out now leaves less capital to recoup losses.
The tax implication
Taxation laws change all the time, so check with your financial or investment advisors, or even government websites, to find out the latest information. However, withdrawing large amounts from your pension could result in a larger than the expected tax bill. Be very aware of moving into a higher bracket, impacting all your earnings for the year.
Another consideration when accessing your pension early is that you then have limits on what you can contribute if you do happen to return to work. Currently, you’ll incur a tax charge if you put in more than £4,000 in a year.
Preparing for 2021
Whilst the pandemic still rages, vaccines are being distributed, and there is finally a light at the end of the tunnel. The good news is that experts predict that the economy will return to normal in due course. However, right now, the situation remains bleak, as does cash flow for many people. To protect the balance of your pension funds now and in early 2021, here are some suggestions:
If you need to take funds out, try to limit it to the income and dividends earned and leave the capital alone.
If possible, try to create an emergency fund. While this may be a struggle in the current climate, when things return to normal, put aside at least one full year’s expenses. If we ever go through another event like this, you’ll have ready cash available to see yourself through.
Seek professional advice
In times like this, it’s easy to let emotions take over and in turn, make drastic decisions. Book a FREE Consultation with one of our experts about what all your options are; flexibly accessing your pension may, or may not, be the best option, so get advice first. You’ll be thankful later that you did.