Has Covid-19 affected your pension? Hereâ€™s how to weigh up the impact and rebuild it
Lockdowns and restrictions have affected the financial security of millions of people. While the short-term impact has been the focus, it could have a long-term effect on your financial security too if it affected your pension savings.
Over the last 18 months, those who faced financial uncertainty in the pandemic may have cut back pension contributions, stopped paying into their pension altogether, or even dipped into their savings. These actions can have a long-lasting impact at any point in your working life. But itâ€™s particularly worrying for those who are nearing retirement.
The over-50s have been among the most affected by the pandemic. According to a Scottish Widows study, this age group were the most likely to face job and income losses. Almost a quarter (23%) of people in their 50s lost their job or income due to the impact of Covid-19.
This age group also has more self-employed workers. Some 17% of people in their 50s are self-employed, compared to only 12% of 25â€“49-year-olds. With less job security and gaps in government support, self-employed workers have faced challenges. More than half of self-employed workers said their finances have suffered.
As a result, itâ€™s not surprising that more than half of over-50s fear running out of money in retirement.
Did you reduce or stop your pension contributions?
When money is tight, the first step is often to review where you can cut back. As your retirement might be some time away, reducing or stopping pension contributions can seem harmless. But the impact might be bigger than you think.
Your pension doesnâ€™t only miss out on the contributions you make. You could also lose tax relief and employer contributions. On top of this, your pension is usually invested and benefits from the effects of compounding over the long term. A relatively small break or reduction in pension contributions can have a much larger impact when you assess the forecast value.
So, how does this affect your retirement?
In some cases, youâ€™ll still be able to meet your retirement goals even though youâ€™ve changed your pension contributions. But itâ€™s important to check. A quick review means you can still look forward to your retirement in confidence or highlight where there may be a shortfall.
A pension shortfall doesnâ€™t mean you have to give up retirement dreams. The sooner you know, the better the position youâ€™ll be in to make changes. A small increase in pension contributions once youâ€™re more financially secure could mean you bridge the gap by the time you retire.
Whatâ€™s important is that you understand the long-term implications changing your pension contributions could have. If youâ€™d like to talk to a financial planner, please contact us.
Two things to keep in mind if youâ€™ve dipped into your pension savings early
If youâ€™re over the age of 55, you may have accessed your pension to tide you over during the pandemic. While useful, you also need to consider whether it could affect your retirement lifestyle.
According to Scottish Widows, the number of over-55s dipping into their pension savings has jumped 10%. In the first three months of 2021 alone, 383,000 people withdrew money from their pensions. While some may be ready to retire, the jump suggests that thousands of people are using their pensions to cover the financial impact of the pandemic.
If you dipped into your pension early, here are two questions to answer.
1. Will it affect your retirement?
As with changing your pension contributions, you should first assess the impact of making an early pension withdrawal. Your pension is designed to provide you with an income throughout retirement. Taking a lump sum early could mean that youâ€™re no longer on track to achieve the lifestyle you want.
Do you still have enough to reach your retirement goals, or do you need to increase your contributions? It can be difficult to understand how a pension will translate into an income. If you need some help with this, please contact us.
2. Has it reduced your Annual Allowance?
If youâ€™re not ready to retire yet, you may want to continue paying into your pension. Accessing your pension can trigger the Money Purchase Annual Allowance (MPAA), which reduces the amount you can tax-efficiently save through a pension.
Usually, you can save up to ÂŁ40,000 or 100% of your annual earnings, whichever is lower, into your pension each tax year while still benefiting from tax relief. However, once the MPAA is triggered, this is reduced to just ÂŁ4,000. It can have a huge impact on the amount youâ€™re able to tax-efficiently save between now and retirement, and, therefore, towards your retirement income.
If your pension savings have been affected, you donâ€™t need to panic. There are often steps you can take to ensure your retirement plans stay on track. Being proactive and assessing the impact now means you can bridge a gap if necessary. Get in touch if you need to assess your pension.
Please note:This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.