The Covid-19 pandemic has generated considerable uncertainty in 2020 in many areas of life, not least in savings and pensions. Most people understand that long-term investments and pension plans perform most profitably if left untouched for a considerable period. With HMRC figures reporting a 23% increase in the number of people using flexible pension drawdowns compared to the first quarter of 2019, why have more investors chosen to access their long-term savings instead of allowing a period of recovery to boost their investment income?
Drawing down from a flexible pension scheme is, of course, an entitlement once you reach 55, but usually with a significant reduction in annual income. Consequently, many people choose to leave their pension untouched for longer, or until they.
The Covid-19 crisis, however, has caused unexpected financial pressures for a vast swathe of the population. Furloughed employees, and those made redundant because of the pandemic, may have delved into their investments to provide instant financial stability at a time of significant pressure.
The Problems of Early Drawdowns
Accessing your pension early isn’t always a bad idea. If you’re over the age of 55 and facing redundancy, making drawdowns can be a practical solution to the need for a stable income. However, anyone who is thinking about raiding their pensions should consider the risks in doing so:
Lower Investment, Longer Provision.
The sooner you access your pension, the quicker it will run out. If you’ve planned to retire when you reach the state pension age, but suddenly decide to cease working at 57, you’ll be paying much less into your pension, and will therefore have less money to live on, during a longer retirement.
Early Access Means Lower Contributions
A pension is not a simple savings account where you can withdraw lump sums at will and hope to repay them later. Tempting though it may be to use your pension to plug the gap in your income temporarily, doing so will limit how much you can pay in later, as your annual allowance will fall considerably. This will have a negative effect on the value of your pension once you finally decide to hang up your work uniform and reduce how much you have to live on in your retirement.
Pension Scams That Target Anxiety
One measurable outcome of the Covid-19 crisis is the surge in financial scams, including pension fraud. People, tempted by the promise of instant cash to plug a financial black hole caused by redundancy, may be led to believe that accessing their pension pots before the age of 55 could be the perfect solution. Doing so, however, is illegal in many circumstances and subject to excessive taxation, meaning you’ll lose far more than you gain.
The Importance of Seeking Professional Financial Advice
Making changes to your pension plan can cause unexpected consequences. For example, making a single lump sum withdrawal can drastically alter your tax status, as HMRC will make assumptions about future drawdowns and tax you accordingly.
Seeking professional financial advice will ensure that you fully understand the implications of your actions before you go ahead with any changes. At SIFA, our expert financial advisors can help you to understand and capitalise on your available choices. For more information or to book a review of your pensions and investments, get in touch today.
