Pension Awareness Week 2022 - your questions answered

Pension Awareness Week aims to promote the importance of pensions and saving for the future. To mark the occasion, we have addressed some of the more pressing questions surrounding pensions to help you make the most of your allowances and ensure you are in the best position possible for when you retire.

Will a new Prime Minister affect your pension?

Despite Rishi Sunak now running the country, any pension allowances and/or rules are yet to change. For quite a few years now, the UK has been in a state of uncertainty. Whether it be Brexit, a change of Prime Minister, the COVID-19- pandemic, the crisis in Ukraine or soaring inflation (and yet another change of Prime Minister), we have been faced with challenge after challenge. However, one thing that has remained unchanged is the importance of saving for your future. Ultimately, regardless of who is running the country, you will still need an income in retirement, which is best achieved by investing in your pension.

Interest rates are likely to continue climbing and certain allowances may change with Jeremy Hunt retained as Chancellor (standby for the Autumn Statement on 17 November), but that should not deter you from investing in your pension. It’s crucial to remember that pensions are long-term savings vehicles and should be seen as just that, and not neglected due to geopolitical issues that are likely to have little to no long-term impact.

With inflation still on the rise, how is your pension likely to be affected and what can you do about it?

You may have seen the headlines, “UK inflation reaches 40-year high” and more recently, banking giant Goldman Sachs’ prediction that UK inflation could reach 22% in January*, while the Bank of England has forecast that it will tip over 13% in Q4**. On the surface, the headlines are enough to concern some investors, particularly those that are concerned about retirement and their pension. And especially when inflation headlines are coupled with articles detailing the unprecedented rate at which the Bank of England is hiking interest rates.

However, our message throughout this period has (and will continue to be), ‘stay disciplined and stay invested.’ A pension should be seen as a long-term plan. Pulling your investment to retreat to cash in response to short-term market volatility can result in significant losses over the long-term. Those who remain invested over the long-term typically do better than those who try to cash out when volatility strikes.

Although these headlines are daunting, keep in mind that these forecasts are only looking at the next six to twelve months. Pensions are intended to last much, much longer. If you have any concerns, consult your PWM adviser or contact us for professional advice.

Thinking of the future generations, have you considered investing in a Junior SIPP?

Most parents consider investing in their children’s future a priority, and often open a savings account or Junior ISA for them, with the latter carrying a tax-free allowance of £9,000 per year. Another vehicle that some parents may not be too familiar with is a Junior Self Investment Personal Pension (JSIPP). A JSIPP carries a £3,600 gross allowance per year, and it’s important to remember that these allowances are per child, so if you have more than one, you can start investing in all their futures.

What are the implications of breaching the lifetime allowance and how could you prevent it?

If the value of your pensions is nearing the current lifetime allowance of £1,073,100, or is likely to reach the limit by the time you retire, be aware of the rules surrounding the cap. The lifetime allowance is set by the government, and it limits how much you can save in pension benefits while still taking advantage of the full tax benefits. However, if you go over the allowance, then it’s likely you will incur a tax charge on the excess when you either withdraw a lump sum, take an income from your pot, transfer overseas, or reach 75 with unused benefits. Usually, you would be liable to pay 25% of any income or 55% of any lump sum.

However, there are a couple of options you may wish to consider if you are nearing the allowance:

Fixed protection 2016 offers a lifetime allowance of £1.25m, but keep in mind that you cannot apply for this allowance if you made pension contributions after 5 April 2016.
Individual Protection 2016 provides a personalised lifetime allowance that is equal to the value of your pensions on 5 April 2016. However, to qualify for this allowance, your pot must have been worth more than £1m, and the cap is £1.25m.

Seeking professional advice prior to making any decision will ensure you are making the right move for your individual set of circumstances.

When is the best time to start drawdown?

This is a question that many people will be asking as they approach retirement. Pension drawdown allows a 25% lump sum to be taken from your Defined Contribution pension pots and leave the rest invested, offering you a great deal of flexibility in determining how and when you want to withdraw the rest of your pot. Leaving the money invested provides more time to grow, meaning that it could potentially last longer. This option is particularly popular for those with large pots, or for those that have opted to still work part-time and so still receive a monthly salary.

While this is a suitable option for those who want to accumulate more wealth in retirement, it’s also important to remember that by leaving your money invested, there is still a possibility that the value of your pension pot will decline in the event of a market downturn.

Are you on top of your pension admin?

Throughout your working life, it’s not uncommon to have worked for several employers. In addition, it is highly unlikely that each of those employers used the same pension provider, which means you are likely to have multiple pension pots. Are you aware of each pot? Do you know how much you have saved in each pot? Do you know where each pot is? If the answer to any of those questions is ‘no’, then consider enlisting the support of a financial adviser, who can advise you before you retire.