Western Daily Press (Saturday)
How to access pension funds without leaving your retirement plans in tatters
With many dipping into their pots to help with soaring bills, TRICIA PHILLIPS looks at how to access savings safely without leaving yourself short later
A WHOPPING £3.57billion was withdrawn from pensions in the three months between April and June as the cost-of-living crisis is forcing savers to dip into retirement funds.
Latest figures from HM Revenue & Customs on the number of people taking cash flexibly from pension pots show almost £60bn has been emptied out since pension freedoms were introduced in April 2015.
The latest withdrawals have set alarm bells ringing in the industry as experts fear people may be taking too much cash out of pension savings, and too quickly, to help prop up household finances as food and energy prices soar.
A record 500,000 people withdrew the £3.57bn over the three months, that’s up 23% on the £2.9bn withdrawn over the same period last year.
Meanwhile, the amount being raided from pots rose to an average £7,000 compared to £5,700 taken out in the first three months of this year.
It’s vital that savers understand how taking cash flexibly from pensions works. It’s complex – from the amount of tax you will pay to how accessing pensions can affect your ability to save, and there is a risk of running out of cash too quickly and ending up struggling in your older age.
Here we explain the ways you can safely take money from your pension, along with tips on how to manage the tax you’ll pay on any withdrawals.
Anyone over the age of 55 with a personal pension has the opportunity under pension freedoms to access their pension.
You can withdraw the first 25% tax-free, while the remainder will be taxed at your marginal rate of income tax in the tax year you make the withdrawal.
This could mean you pay 20% or even 40% on the taxed element of the pension withdrawal.
It’s worth noting the tax changes announced in the recent miniBudget. If they go ahead, this will mean from April next year the lower tax rate on any withdrawals will be 19%.
Andrew Tully at pensions giant Canada Life explains: “Once you’ve taken your tax-free cash, HMRC treats any further withdrawal as income, which could mean you pay 40% tax, depending on the size of the withdrawal and any other earnings you may have.”
A pension is a very tax-efficient way of saving, so if you have access to other savings, for example ISAs, or even Premium Bonds, consider using these first rather than your pension, especially if you are still working and are looking to use the money to help with your household bills.
Once you dip into your pension above the first 25% that’s tax-free, then the Money Purchase Annual Allowance (MPAA) restricts your future savings to £4,000 a year. This is important to remember if you plan to continue working and want to carry on topping up your pension.
The £4,000 cap includes both your contributions, and any contributions your employer makes on your behalf, as well as any tax relief.
Andrew adds: “If you plan to continue working and are keen to rebuild your pension through ongoing contributions, then the sting in the tail is the MPAA, which may interfere with long-term financial plans. Serious consideration needs to be made to decide the best course of action for your individual circumstances, and often, the pension should be considered the funder of last resort.
“It’s understandable, however, that people need to balance the needs of today, withdrawing money to meet cost-of-living challenges, with the needs of tomorrow, providing a retirement income in the future.”
You can withdraw the first 25% [of a pension] tax-free...