Pension pots set to be accessed early by 11% of over-55s amid Covid-19

Over one in 10 (11 per cent) of over-55s with a pension have already accessed or plan to access their retirement pot early due to Covid-19, according to AJ Bell.

The company noted that with more than 1 million people now enrolled into the furlough scheme and millions more facing unemployment, pay cuts or severe job insecurity, there are a number of key issues savers must consider before accessing their pension early.

AJ Bell pointed out that over-55s looking to cash in early could trigger the money purchase annual allowance (MPAA), cutting the amount most people can save into a pension each year from £40,000 to £4,000, while savers should also consider how early withdrawals could affect the sustainability of their plans.

AJ Bell senior analyst, Tom Selby, said: “As an example, someone taking a 5 per cent inflation-adjusted income from their fund who experiences a 20 per cent drop in the value of their fund in the first year of drawdown – as many have recently – could see their money run out after 18 years.

“Given many people can expect to live well into their 90s, such a withdrawal plan would risk being unsustainable even for someone who started in their mid-to-late 60s, let alone before your 60th birthday.”

Savers also risk missing out on tax free cash, as crystallising their pension pots and potentially taking their 25 per cent tax free cash at a time when the FTSE 100 has dropped by 20 per cent since the beginning of the year means they are likely to miss out on the effect of their investments bouncing back.

Selby commented that someone with a £100,000 fund that dropped by 20 per cent to £80,000 during the coronavirus crisis, would see their maximum tax-free cash amount drop by £5,000 to £20,000.

As such, Selby argued that savers who need to raise money and have exhausted all other means should consider partial crystallisation as “one way of mitigating the impact on your overall tax-free cash entitlement”.

Over-55s also have the option of taking an ad-hoc lump sum, of which 25 per cent would be tax free, though this would automatically trigger the MPAA.

Selby noted that savers must also consider that they can continue contributing to their pension after crystallisation in order to build up a new tax-free cash entitlement, with those that have still left their taxable income untouched still likely having an annual allowance of £40,000.

Finally, he recommended savers in their 50s looking to access tax-free cash used it as an opportunity to review “retirement plans, ultimate goals and how your investments can help you achieve these”.

Selby stated: “While many will understandably be spooked at the idea of investing at the moment, it is worth remembering that short-term volatility has historically been the price you pay to enjoy longer-term growth.

“Investors also need to be aware of and comfortable with the risks they are taking. Although investments can go down in value as well as up (as we have seen in dramatic circumstances recently), the value of any investments left in cash will be eaten away by inflation over time.”

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