Furlough and SEISS support was extended recently as Rishi Sunak laid out his 2021 Budget. These schemes, along with other forms of support, can be utilised through to September but many are worried about how the economy will cope without Government contributions.
Andrew Megson, the executive chairman of My Pension Expert, reflected on how pensions and retirement planning may be impacted by the ending of Government support: "Britons’ personal finances have been placed under an unprecedented strain since the onset of COVID-19, due to furlough and redundancies.
"Government support has worked well in helping businesses protect the livelihoods of savers all over the UK.
"However, reducing support before the UK economy has been able to return to normal could endanger this security.
“Consequently, people are likely to shift their focus from long-term savings goals, such as pension pots, to short-term finances such as maintaining household bills.
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Andrew concluded by detailing what savers should do in light of these challenges: "Ideally, people should continue to contribute to their pension for as long as possible to safeguard their retirement.
"I would therefore advise people who are worried about their cashflow to reassess their budget and see where cuts can be made instead.
"However, those really feeling the strain could consider reducing their contributions.
"This way, they will be able to reap the benefits of employer top-ups and tax relief, whilst giving themselves an opportunity to regain control of their finances.”
Pension holders may have been left with few options over the last year or so, with recent analysis showing 21 percent of over 55s experienced a decrease in their personal income during 2020.
As such, many retirees may have had no choice but to dip into their pension savings.
But Ed Monk, an associate director for Personal Investing at Fidelity International, warned this could trigger costly tax charges and harm retirement prospects: "We’re still only beginning to learn the economic effects of the pandemic, but we already know that the costs have not fallen equally.
"While the level of household savings accumulated over the past year has been well-documented, many will not have benefitted from this extra saving and will have made difficult financial decisions to cover more immediate challenges - potentially turning to their pension savings.
"Those who have taken taxable money in this way will have triggered a reduction in the amounts they can pay into a pension in the future and still enjoy tax relief. This short-term cash boost from their pension could well restrict their future retirement savings."
Ed concluded by explaining what causes these tax costs and what can be done to navigate it for those with limited options: "The reduction comes as a result of something called the Money Purchase Annual Allowance (MPAA). When activated, the MPAA replaces the normal Annual Allowance for pensions which limits contributions to Defined Contribution pensions to £40,000 a year, or the value of your earnings in that year if it is lower. Contributions above that level do not enjoy tax relief.
“The MPAA lowers this limit to just £4,000. It is triggered when a person makes a taxable withdrawal from their pension. That includes withdrawals made using Flexi-Access Drawdown, Uncrystallised Funds Pension Lump Sums and some instances of money used to buy an annuity. It does not apply if you withdraw any of the 25 percent of your pension pot which is allowed to be withdrawn tax-free.
"There are ways to avoid the MPAA, even if you do need money from your pension. As mentioned, tax-free cash does not activate the MPAA. Additionally, the rules governing small pension pots of less than £10,000 allow these to be withdrawn without triggering the MPAA either.
“It makes sense to get some professional help if you are weighing up decisions which involve using your pension money. The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement.
“Another option is independent financial advice, which can provide both guidance and advice around your retirement options. If you are looking to access your pension for drawdown, guaranteed income (annuities) or tax-free cash, it can help, and may even ensure you avoid any inadvertent tax issues.”
Do you have a money dilemma which you'd like a financial expert's opinion on? If you would like to ask one of our finance experts a question, please email your query to personal.finance@reachplc.com. Unfortunately, we are not able respond to every email.
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