Looking after your pension during the pandemic

During the ongoing uncertainty created by the Covid 19 pandemic, it is inevitable that people’s top concern is the health and safety of their loved ones. However, as the lockdown continues, and the Bank of England publishes extremely worrying forecasts for the economy, the financial burden that many are facing gets ever heavier. Nigel Hatt, pension specialist at Tilney, looks at how you can help make your pension work to its full potential during this difficult time.

Pay in whilst you can

“Despite the market turmoil caused by the Covid 19 pandemic, it is advisable to maximise your contributions if you can as units will command a lower price than normal so your money will go further. If money is tight, for example because your pay has been cut or you have been furloughed, try nonetheless to maintain pension funding momentum if you can. Consider reducing your expenditure in other areas if possible, e.g. take a mortgage payment holiday or if need be reduce your contributions. However to be eligible for the minimum 3% employer contribution under ‘Auto-enrolment’ you must pay in at least 5% of your salary as a personal contribution.

“One of the benefits of paying in to a pension regularly is that it averages out the cost of pensions over time. Remind yourself of the tax relief available on pension contributions; if you earn over £150,000 p.a. a pension contribution can cost you as little as 55% of what you are contributing because the Government tops up your fund to the tune of 20% and any further tax relief due, be it higher or additional rate, is credited via your PAYE tax coding. Pension tax relief could well be restricted in the future so take full advantage of it now. Don’t forget that you can also use ‘carry forward’ to mop up any unused tax relief going as far back as the 2017/18 tax year provided you have been a member of a registered pension scheme at some stage during each of those tax years.

“The key point to remember in all this is that a pension is a long term savings vehicle so you need to avoid opting out of our pension at all costs otherwise you will lose the benefit of the employer contributions. Even if the opt out period only covered the Covid 19 crisis the impact this could have on your pension could be severe.

Resist the temptation to raid your pension without serious thought

“The advent of the ‘Pension Freedoms’ has enabled people to access their pension at will from the age of 55 but if a pension is accessed from your drawdown pot you will be severely restricted in the amount you are able to contribute to pensions in the future. In many cases your contribution allowance will be one tenth of the existing limit. In view of this, do not be tempted to draw from your pension unless it is absolutely necessary. If the Covid 19 crisis has caused a cash flow issue for you be very careful how you arrange any pension fund withdrawal you feel obliged to make. If you have a small pension fund, if possible try and split it into three separate arrangements totalling not more than £10,000 per arrangement. This will enable you to use the ‘small pots’ method for drawing your pension; this will enable you to retain your original contribution limit. Similarly accessing only a tax free cash sum with no income is another way to avoid the reduction in contribution allowance.

“Having said this tapping into your pension fund will not be right for everyone so consider other income streams to meet your needs or just try to ride out the crisis at least in the short term.

Review your Nomination Forms

“With a pension you can nominate who you wish to benefit from any residual fund left when you die. Not only is it important for you to regularly review your nominations but it is also important for your beneficiaries who are in receipt of income drawdown pensions to do likewise. There is great flexibility in terms of how funds remaining on their death are distributed. In particular as the beneficiary approaches age 75 consideration needs to be given to allocating some of the fund to grandchildren or even great grandchildren if the original beneficiaries do not consider that their children will need the entire fund when they die.

“The trustees cannot set up an income drawdown pension for a non-dependant beneficiary unless they have been nominated by you. For example if you nominate your only child, say a daughter, to receive the death benefits but on her death the daughter declines as she would prefer it if her children received the benefit, the trustees would be restricted to paying a lump sum to them so any excess over the personal allowance would be taxed. This would not be a tax efficient outcome.

“You should nominate all possible beneficiaries to whom you would be happy for benefits to be paid (including an income drawdown pension) to give the trustees maximum flexibility in the event of a change of plan being required.

Don’t be fooled by scammers who will be after your pension

“Much work is being done to protect customers and to reduce the incidence of scams but they remain a sad fact of life. Legislation has been proposed to empower pension schemes to withhold the payment of a transfer value if they suspect that the designated receiving scheme is not a bone fides scheme. This is a particular risk in the context of a defined benefit scheme in the current crisis as scammers could try to fool unsuspecting customers into thinking that the sponsoring employer is going to go bust and thus encourage them into transferring their pension to a bogus scheme. Warning signs to watch out for in a potential scammer are:

• Being promised unrealistic investment returns on the transfer value offered
• Being pressured into acting very quickly

“Remember the old adage that if the deal sounds too good to be true it probably is so check that the Firm who has approached you is genuine by consulting the FCA list of regulated Financial Advisers. If you suspect a scam do not respond to the person who sent the communication but instead report the matter to Action Fraud.

Despite low rates, annuities still have a role to play

“Annuities provide a guaranteed income from life but have become less popular since pensions were made more flexible. The accepted wisdom is that annuity rates are driven by competitive pressures between providers and the yields available from gilts. A progressive contraction of the annuity market since the ‘Pension Freedoms’ were introduced in April 2015 has reduced competition and until we see an increase in yields, annuity rates are unlikely to improve significantly.

“Having said this, there is no doubt that annuities have a key role to play in financial planning as they underpin essential expenditure so you may feel inclined to phase annuities in order to avoid locking into a single rate on one day. A particular advantage of phasing is that annuity rates improve with age so become more and more appealing along the retirement journey. Longer guarantees can be very attractive for dependants too and the fact that annuities can even be paid to non-dependants from deaths arising since 2^nd December 2014 is another bonus.

“Innovative thinking has resulted in annuities being used in conjunction with drawdown to give you a guaranteed income and flexibility with unwanted annuity instalments being credited to the drawdown pot. The latter can be passed down the generations on death so annuities enhance the outcome for the family as a whole.

“With the increasing demise of final salary schemes and the increasing dependence on money purchase schemes there has never been a more important time to promote pensions and annuities are bound to form a permanent part of the landscape in life’s longest holiday. There is still a need for greater choice though hence the arrival of collective defined contribution schemes as a half-way house between pensions guaranteed by the employer and entirely self-funded pensions. The message is only annuitize to the extent that it is absolutely necessary especially in the current market.

“As has been said many times, but cannot be understated, we are living in unprecedented times. If you have any queries surrounding your pension, or any other aspect of your finances, it is always best to consult your financial planner.”