29 July 2020
People entering or approaching retirement in 2020 should carefully plan how and when to access their pension, in order to maximise annual allowances and tax-free benefits.
According to wealth manager Brewin Dolphin, there are a number of factors people approaching retirement should consider before making any decisions about accessing their pension pot. The Covid-19 pandemic has impacted many families’ circumstances, not least from a financial perspective.
While stock markets are beginning to recover from the initial crash, a report by Moneyfacts estimated that the average pension fund fell by -15.2% during the first three months of the year.1
Alan Harvey, financial planner at Brewin Dolphin, said: “For those approaching retirement this year, or even in 2021, employment circumstances, changes to income and market performance may have impacted your plans. However, at the same time, lockdown has also changed our spending patterns and, therefore, you should revisit your budget and assess what you really need.
“Some people might have managed to save some extra cash over the last few months, which could be spent first, but for those expecting to dip into their pensions, there are a number of rules to think about before making any decisions.”
1. Taking a tax-free lump sum
Under current rules, retirees or those who reach the age of 55, can withdraw up to 25% of their defined contribution pension pot as a one-off, tax-free lump sum. While this option can give your bank balance a short-term boost, it has a potential knock-on effect for future income.
Alan Harvey said: “Depending on the size of your pension pot, 25% may in fact be much more than you need, especially while our discretionary spending is down. Interest rates on savings have also dropped significantly, meaning there is little benefit from having this excess cash sitting in the bank. That said, we would always recommend keeping an emergency fund equivalent to six months of expenses, building in any planned large one-off purchases.
“For high value pension pots, you also need to think about any IHT implications, as this cash sum will then be counted as part of your overall estate. You might consider gifting some cash as part of your annual allowance, however, with that comes another set of rules to consider.”
2. Small pots pensions rules
If the value of a pension is under £10,000 you may be able to take it all as a small pot lump sum, irrespective of your overall pension’s worth. If you withdraw the entire small pot, 25% is tax-free. Similarly, defined benefit schemes fall under triviality rules allowing a pension of up to £30,000 to be taken as a lump sum.
Alan Harvey said: “Retirees with multiple small pots should take some time to consider how to get the most from these pensions. One option is to take a small lump sum which could provide what might be a much-needed cash boost in the current climate. Alternatively, people may want to consider consolidating two or three small pots into a larger one and taking a 25% lump sum from that larger total – although there will potentially be transfer and exit fees to consider.”
3. Triggering the Money Purchase Annual Allowance
If you start to drawdown money from a pension, tax rules around the amount you can pay into your pension change, triggering a new allowance known as the Money Purchase Annual Allowance (MPAA). In 2017/18 the MPAA dropped from £10,000 to £4,000 and it can be triggered by a number of events that might occur if pension contributions continue after initial crystallisation.
Alan Harvey said: “Unfortunately, the pandemic has had a huge impact on the workforce – many have been furloughed and others may be at risk of redundancy. For anyone in this situation over the age of 55, they may have chosen to access their pension to top up their income. However, this group needs to be aware of the MPAA when returning to work.
“Once triggered the MPAA applies for the remainder of that individual’s lifetime and should be a particular consideration for anyone continuing or returning to work while accessing the flexible benefits of their pension. These rules can be complex, so do consult your adviser if you have one.”
4. Crystallising your pension, what next?
From the age of 55, you can crystallise or ‘cash-in’ a pension, taking a tax-free lump sum. At this point you also need to decide how to draw future income. Once your pension is crystallised, there are various changes to consider, including income drawdown rules and the MPAA.
Alan Harvey said: “People who have contributed to multiple pension pots should consider whether they need to crystallise all of these pots at the same time. Leaving your investments for as long as possible allows more time for growth, and more time to potentially recover from market volatility.
“When deciding what to do next, you should also consider your appetite for risk. Following the crisis, we have seen people’s attitudes towards risk change, especially those approaching retirement who may not have the luxury of time in the market.
“While annuity rates have also fallen in recent months, it’s a retirement option that can offer a level of security during times of uncertainty. Particularly for those looking to minimise their exposure to risk, this guaranteed income option could provide you with invaluable peace of mind.”
-ENDS-
PRESS INFORMATION
For further information, please contact:
Libby Keiller libby.keiller@framecreates.co.uk / Tel: 07714 285 202
Richard Janes richard.janes@brewin.co.uk / Tel. +44 (0) 20 3201 3343
Anita Turland anita.turland@brewin.co.uk / Tel: (0) 20 3201 4263
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
NOTES TO EDITORS
About Brewin Dolphin
Brewin Dolphin is a UK FTSE 250 provider of discretionary wealth management. With £41.4* billion in total funds, it offers award-winning personalised wealth management services that meet the varied needs of our clients including individuals, charities and corporates.
We give clients security and wellbeing by helping them to protect and grow their wealth, in order to enrich their lives by achieving their goals and aspirations. Our services range from bespoke, discretionary investment management to retirement planning and tax-efficient investing. Our focus on discretionary investment management has led to significant growth in client funds and we now manage £35.7* billion on a discretionary basis.
Our intermediary business manages £12.5* billion of assets for over 1,700 advice firms either on a discretionary basis or via our Managed Portfolio Service.
In line with the premium we place on personal relationships, we’ve built a network of 33 offices across the UK, Jersey and Dublin, staffed by qualified investment managers and financial planners. We are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
*as at 31st March 2020
Disclaimers:
- The value of investments and any income from them can fall and you may get back less than you invested.
- The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.
- Past performance is not a guide to future performance.
- We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition, we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk.
- This information is for illustrative purposes only and is not intended as investment advice.
- No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
- The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
- Please note that this document was prepared as a general guide only and does not constitute tax or legal advice. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Tax treatment depends on your individual circumstances; therefore, you should not rely on this information without seeking professional advice from a qualified tax adviser.
- Brewin Dolphin is authorised and regulated by the FCA (Financial Services Register reference number 124444).