Warning for over 55: Don’t raid your pension to fight inflation


Pension experts are warning people over 55 not to use their retirement savings to help them navigate the cost of living crisis.

Inflation soared to 9% in April due to rising food, fuel and transportation costs and put pressure on the finances of many households. Those with access to the pension pot may be tempted to pull out the money to cover their immediate expenses, but this risks significantly diminishing their earnings in the future.

Steven Cameron said, “As the cost of living continues to tighten, more and more people will inevitably be tempted to receive higher pensions or earn more faster than planned.” He is the director of Aegon, one of the UK’s largest pension providers.

Legal & General said the rate at which investors withdrew from funds increased this year compared to last year, and is “carefully monitoring” whether this is due to rising cost of living. In the first four months of last year, 5% of pensioners made temporary withdrawals. This year, 18% did. “When the cost of living crisis hits, people are more likely to have earlier access to their savings and then withdraw at a higher rate,” says Emma Byron of Legal & General Retirement Solutions.

Since reforms implemented by then-Prime Minister George Osborne in 2015, savers have more access to their retirement savings from age 55 onwards. their funds.

According to figures from HM Revenue and Customs, in the last three months of last year, 428,000 people A total of £2.69 billion was withdrawn. from personal pension savings. Earlier this year, online trading platform Interactive Investor revealed that customers withdrew an average of £1,944 in January, up 25% from the same period last year.

Hargreaves Lansdown’s Helen Morrissey said April 1’s energy price cap hike marked a milestone when the cost of living crisis became apparent to households.

still working and investing

Annuities exist to ensure financial stability throughout the years of retirement. However, investors who withdraw money from their pots may see their future security jeopardized if they consume their funds too early.

If you withdraw your money early, you will lose your growth potential, so you will ultimately have less money when you retire.

For example, if someone who has £100,000 in a pot at 55 doesn’t pay any more, then at a 5% annual growth rate, they can expect to grow to almost £165,000 by the time they turn 65. However, if they subtract £25,000 at age 55 to lower the pot to £75,000, they could eventually grow to £123,000. This is a potential loss of £32,000.

Taking money out of your pension makes sense for those over 55. They can pull out a 25% tax-free cash lump sum, but money accessed after that is taxed as income for that year.

Withdrawing money may affect how much you can continue to pay into your defined contribution port, even if you are in a position to top it up later.

Under current rules, you can make an annuity contribution of up to £40,000 and qualify for a tax deduction on that contribution. However, take out A series of lump sums from an annuity, can trigger Money Purchase Annual Allowance (MPAA), reducing the amount payable in an annuity pot to £4,000, along with a tax cut. MPAA also occurs in other scenarios, such as when you receive your entire annuity as a lump sum.

Interactive Investor’s Rebecca O’Connor has called for a £4,000 increase in the MPAA. “This will allow seniors 55 and older who have received a pension but are still working to receive more contributions and tax cuts so that they can eventually receive their pension as healthy as possible before retiring,” she said.

if you are already retired

Many people plan to retire as they steadily withdraw from their pots. But withdrawing money faster to process your daily bills will change everything, says former pension secretary Steve Webb (now working as a pension consultant LCP).

“You don’t want to do that early in your retirement,” he says. “What you do at 80 is completely different from what you do at 65.”

However, there is a way to avoid soaking in an alchemy pot.

Low-income pensioners pension credit, Morrissey says, is a “very understated benefit.” Pension credits can supplement the income of the poorest pensioners and serve as a gateway to other benefits such as congressional taxes, utility bills and mortgage interest.

“Annuity credits are plagued with myths that prevent people from claiming superannuation,” she says. “Many people feel that they do not qualify for pension credit if they have savings or a home. None of this is true, so it’s good to see if you qualify.”

The call has already come. National pension increase However, this may be too late for many. Webb said: Some people will see excess deaths because they cannot afford to live.”

Due to the reforms in 2015, fewer people are using their annuities to buy annuity because the income from savings is relatively small. retiree Fixed Income Pension It will be particularly affected by rising inflation. Webb says there are annuity products that track inflation, but they are so expensive that they rarely buy them.

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