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7 from 7: Pensions special

7 min read
Daniel Wood, Senior Financial Planning Director01 Nov 2022

It’s Pension Awareness Week 2022 and to celebrate the occasion, we’ve put together a special edition of 7 from 7, where we address some of the more pressing questions in the pensions space.

1. With another new Prime Minister residing at No.10, what could this mean for your pension?

In all honesty, at the moment, it doesn’t mean very much at all. Despite Rishi Sunak now running the country, any pension allowances and/or rules are yet to change. For quite a few years now, the UK has been in a state of uncertainty. Whether it be Brexit, a change of Prime Minister, the Covid-19 pandemic, the crisis in Ukraine or soaring inflation (and another change of Prime Minister!), we have been faced with challenge after challenge. However, one thing that has remained unchanged is the importance of saving for your future. Ultimately, regardless of who’s running the country, you will still need an income in retirement and the best way to achieve that is by investing in your pension. And if you’ve partnered with an agile pension provider, such as ourselves, then you’re in the best position possible.

Indeed, interest rates are likely to continue climbing and certain allowances may change (again) with Jeremy Hunt retained as Chancellor (standby for the government's autumn statement on 17 November), but that shouldn’t deter you from continuing to save and investing in your pension. It’s crucial to remember that pensions are long-term savings vehicles and should be seen as just that, and not neglected due to geopolitical issues that are likely to have little to no long-term impact.

2. With inflation still on the rise, how is your pension likely to be affected and what can you do about it?

I’m sure you’ve all read the headlines, “UK inflation reaches 40-year high” and more recently, banking giant Goldman Sachs predicted that UK inflation could reach 22% in January1, while the Bank of England has forecast that it will tip over 13% in Q42. On the surface, the headlines are enough to worry most investors, particularly those that are concerned about retirement and their pension. And especially when inflation headlines are coupled with articles detailing the unprecedented rate at which the Bank of England is hiking interest rates.

However, our message throughout this period has (and will continue to be), ‘stay disciplined and stay invested’. A pension should be seen as a long-term plan, and a very long one at that. Pulling your investment to retreat to cash in response to short-term market volatility can result in significant losses over the long term. As our research shows, those who remain invested over the long term typically do better than those who try to cash out when volatility strikes.

The headlines are scary, there’s no doubt about it. But keep in mind that these forecasts are only looking at the next six to twelve months. Pensions are intended to last much, much longer.

3. Thinking about improving the next generations financial prospects, have you considered investing via a Junior SIPP?

Most parents consider investing in their children’s future a priority, and they would usually do this by opening a savings account or Junior ISA for them, with the latter carrying a tax-free allowance of £9,000 per year. However, there’s another vehicle that some parents may not be too familiar with; a Junior Self Investment Personal Pension (JSIPP). A JSIPP carries a £3,600 gross allowance per year, and it’s important to remember that these allowances are per child, so if you have more than one, you can start investing in all their futures.

4. What are the implications of breaching the lifetime allowance and how could you prevent it?

If the value of your pensions is nearing the current lifetime allowance of £1,073,100, or is likely to reach the limit by the time you retire, then it’s important to be aware of the rules surrounding the cap. The lifetime allowance is set by the government, and it limits how much you can save in pension benefits while still taking advantage of the full tax benefits. However, if you go over the allowance, then it’s likely you’ll incur a tax charge on the excess when you either withdraw a lump sum, take an income from your pot, transfer overseas, or reach 75 with unused benefits. Typically, you’d be liable to pay 25% of any income or 55% of any lump sum.

However, there are a couple of things you could do if you’re nearing the allowance:

  • Fixed protection 2016 offers you a lifetime allowance of £1.25m, but keep in mind that you cannot apply for this allowance if you made pension contributions after 5 April 2016.
  • Individual Protection 2016 provides you with a personalised lifetime allowance that is equal to the value of your pensions on 5 April 2016. However, to qualify for this allowance, your pot must have been worth more than £1m, and the cap is £1.25m.

Seeking professional advice prior to making any decision will ensure you are making the right move for your individual set of circumstances.

5. When is the best time to start drawdown, and what’s involved?

This is a question that many people will be asking as they approach retirement, and it’s a question that could leave many scratching their heads – more so in the volatile, unpredictable world we are living in.

Pension drawdown allows you to take a 25% lump sum from your Defined Contribution pension pots and leave the rest invested, offering you a great deal of flexibility in determining how and when you want to withdraw the rest of your pot. Leaving the money invested gives it more time to grow, meaning that it could potentially last longer. This option is particularly popular for those with large pots, or for those that have opted to still work part-time and so still receive a monthly pay packet.

Of course, while this is a suitable option for those who want to accumulate more wealth in retirement, it’s also important to remember that by leaving your money invested, there is still a possibility that the value of your pension pot will decline in the event of a market downturn.

6. Are you on top of your pension admin? Have you lost track of any pension pots?

Throughout your working life, it isn’t uncommon for you to have worked for several employers. And it’s highly unlikely that each of those employers used the same pension provider, which means you likely have multiple pension pots. Are you aware of each pot? Do you know how much you have saved in each pot? Do you know where each pot is? If the answer to any of those questions is ‘no’, then maybe it’s time to enlist the support of a financial planner, who can help you get your house in check before you retire.

Of course, you can also take advantage of the Pensions Dashboard, which may help you locate some of your pots and identify how much you’ve saved. But then what do you do? Do you consolidate your pots and have them all housed with one provider? Do you keep them separated? Enlisting the support of a professional will allow you to take the most tax-efficient approach, while also establishing a way to meet your financial goals in retirement.

7. Seeking advice

It’s never too soon to start planning for your retirement and, in fact, the sooner you start, the better. And this is a crucial aspect of Pension Awareness Week. Seeking the right advice can help you achieve your financial goals and allow you to have the retirement you want and have worked hard for. So, don’t waste any more time pondering ‘what if’ scenarios. Instead, enlist the support of a flexible, adaptable financial planner to help you best prepare for your future. We have a team of experts on hand to address all your concerns and help you plan effectively for the future.

Tax rules are subject to change and taxation will vary depending on individual circumstances. This article does not constitute advice or a recommendation; please consult a financial adviser. You should be aware that the value of investments may go up and down and you may receive back less than you invested originally.

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