Pension warning: Over 55s impacted by covid urged to consider savings options
Pension freedoms have led to increase in scams warns expert
Redundancy and unemployment is sadly something which many have experienced, or are facing, due to the coronavirus pandemic. Sadly, the financial impact of this unprecedented time will no doubt be of real concern to households across the UK.
For those who are aged 55 or older, a warning has been issued regarding a financial option which may seem appealing to people hit by unemployment.
It’s something which Kay Ingram, Director of Public Policy at national financial planning group LEBC, has discussed this week.
Ms Ingram, a chartered financial planner, warned: “Unemployment is rising, with older workers making up an alarming and growing proportion of those affected by furlough and redundancy.
“Many over the age of 55 have been tempted to access their pension savings as a short-term income solution, and as the third lockdown tightens its grip on the economy, this trend seems set to accelerate.”
We will use your email address only for sending you newsletters. Please see our Privacy Notice for details of your data protection rights.
She pointed out there are a wealth of potential tax and benefits traps which could come when dipping into pension pots ahead of retirement.
Ms Ingram said: “Those facing a short-term drop in income should consider using other savings before drawing on their pensions.
“The tax liability and eligibility for benefits after pension funds are drawn needs to be clearly understood.
“Restrictions on future pension savings can be a barrier to rebuilding those funds, with longer term consequences for the individual’s retirement plans.
“Anyone considering accessing their pensions may benefit from financial advice, which can take account of their longer-term needs and reduce the tax and benefits impacts.”
Among the tax treatment aspects to consider with pension withdrawals as the implications in terms of Inheritance Tax.
Ms Ingram explained that by withdrawing the money, it can be counted as a taxable part of the estate.
“Money inside a pension plan is usually exempt from Inheritance Tax on the death of the pension plan owner,” she said.
“If withdrawn it will be taxable in their estate once the estate exceeds £325,000.”
The chartered financial planner demonstrated the tax and benefits implications via a case study, called Alison.
“Alison, aged 60, has been furloughed from her job since March and is receiving 80 percent of her normal pay of £2,000 per month, leaving her £272 per month worse off,” Ms Ingram said.
“She is worried about losing her job when the furlough scheme ends.
“She decides to cash in £15,000, half of her £30,000 pension pot.
“£7,500 (25 percent) is tax-free, but £7,500 is taxable income.
“Her pension provider taxes the £7,500 as if it is the first of many monthly payments and deducts tax at 40 percent from the whole payment; this leaves her £12,000 from the £15,000 cashed in.
“The tax payable on the pension withdrawal should only be £1,500 if she continues working and could be non-taxable if she loses her job and has little income.
“Alison can immediately claim a tax refund via the Government Gateway or complete a self-assessment return at the end of the year.
“If Alison becomes unemployed, she can claim Universal Credit.
“A single person would be entitled to a standard monthly payment of £409.89.
“The £15,000 she has cashed in from her pension pot means that she will lose £156.60 of this entitlement and receive just £253.29 of benefit each month.”
Source: Read Full Article