Archived article
Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
New data published by the Association of British Insurers (ABI) reveals details of how savers have been accessing their retirement pots during lockdown*. The number of people accessing their pension flexibly increased 56% between April and September, while the number taking their entire pension as a lump sum rose 94%. This increase likely reflects the fact many people sensibly reduced or paused withdrawal plans in March and April as stock markets plummeted. However, some will inevitably have been forced to raid their pension in order to make ends meet.
As markets recovered, it was inevitable that pent-up demand would see withdrawals increase substantially from quarter-to-quarter, which is exactly what we saw in July, August and September’s official figures.
While clearly there has been significant change in people’s behaviour this year, this at least in part should be viewed positively as savers appear to have reacted sensibly to market volatility in order to keep their retirement plans on a sustainable path.
That said, there will inevitably be many who have been forced to dip into their pension earlier than they had previously planned – or to take more out than they wanted to – in order to make ends meet during the crisis.
In fact, research conducted by AJ Bell at the end of April suggested 1-in-10 over-55s had accelerated plans to access their pension as a result of the pandemic. Anyone going down this route needs a plan in place to rebuild their fund, or risk inflicting serious damage to their retirement plans.
Five top tips for people accessing their pension during Covid-19
1. Can you use other income sources to tide you over?
If you take taxable income from your pension, your annual allowance will reduce from £40,000 to just £4,000 (the ‘money purchase annual allowance’ or MPAA). This is one of the main reasons why you might avoid taking taxable income from your retirement pot. If you have money saved in an ISA, for example, you could consider taking this out tax-free, while also keeping your full pensions allowance intact.
2. Take your tax-free cash first
Note that the MPAA only kicks in if you take taxable income from your pension pot. So if you have no other options open to you, taking only your tax-free cash will at least leave you more flexibility to rebuild your retirement fund later on.
3. Do you have a plan?
If you have been forced to access your pension early – or are planning to in the coming months – spend some time thinking about how you can rebuild your fund once your income bounces back. It might be that you need to pay more in as a result to get back on track, or consider working a bit longer. But whatever you do, don’t stick your head in the sand.
4. Sustainability is the key
For those who have already stopped working and are taking a retirement income via drawdown, it is vital to review withdrawals regularly to make sure they remain sustainable. These reviews should happen at least annually, and you should be prepared to potentially reduce your income if your investments suffer significant short-term falls (as we saw in March and April).
5. Consider a ‘natural income’ route
A ‘natural income’ retirement strategy involves living off the dividends your investments produce, thereby preserving the capital value of your underlying fund, allowing it more time to grow. While a natural income strategy has been particularly difficult in 2020 as swathes of companies have cut dividends, positive vaccine news could mean it is more viable in 2021 and beyond.
These articles are for information purposes only and are not a personal recommendation or advice. Pension rules apply.
Written by:
Tom Selby
Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.