Your pension and the cost-of-living crisis

Current economic situations and the cost-of-living crisis have hit us all, with many left finding ways to make ends meet. HMRC figures show that in the last three months of 2021, 428,000 people have withdrawn a combined £2.69bn from personal pension savings1. And, with inflation reaching 9% in April, it’s understandable that many more would be tempted to do so. Especially with over-50s being the group hit the hardest by the cost-of-living crisis2.

A recent survey by Unbiased shows that three quarters of those aged 50 or over are concerned about how rising prices will impact them when they come to retire2. So, whether you are over 55 and thinking of dipping into your pension, or in the run up to retirement and worried about how your pension will last you, we are here to help.

Is dipping into your pension to help with the cost-of-living crisis a good idea?

In general, pension experts are warning over 55s against using their retirement savings to see them through the cost-of-living crisis. This is because your pension needs to last you throughout the whole of your retirement, and taking too much too soon could leave you short later in life.

We understand that everyone’s circumstances are different, however. And in some cases, improving your financial situation now can help future you, too. Accessing pension savings early isn’t right for everyone. So, before you make your decision there are few things you should consider.

Will you be leaving yourself short for retirement?

This is the big one. When people retire, they typically rely on their pension to give them a steady income over the years. Taking money from your pension early will not only reduce the amount left in your savings, it will also mean missing out on the potential growth you could have gained had that money been left in your pension. And this means less money for your later years. So, when accessing your pension early, be sure to consider the steady income you will need to make sure you don’t withdraw too much now.

As a financial adviser authorised and regulated by the Financial Conduct Authority, we can take an in-depth look into your pension and help you know if accessing your pension early is right for you.

Will you incur a large tax bill?

While the first 25% of your pension can be taken tax-free, any further withdrawals you make will be classed as income. This means that it will be subject to income tax at your marginal rate3. Taking too much from your pension in any given year could push you into a higher tax bracket and result in a large bill from the taxman. It’s a good idea to make sure that any withdrawals you make from your pension don’t exceed your annual tax allowance. This is especially important if you are still working as both your work income and anything you withdraw from your pension will count towards your allowance.

Tax can get tricky and complicated. With a financial adviser by your side you can be confident that all tax implications will be considered when helping you to release money from your pension, meaning you can avoid that unwanted bill.

Are you still making contributions to your pension?

If you have a defined contribution pension, the amount you can pay into it each year will generally be reduced once you start to access more than your tax-free cash allowance. So, if you decide to withdraw money while still working, for example, you will need to keep an eye on the contributions you are still making. It will also limit you if you are ever in a position to top up your pension again in the future.

A regulated financial adviser can show you what this could mean for you and help you decide if accessing your pension early is the right thing to do.

We’re here to help

One of the best things you can do when thinking about accessing your pension is speak with a regulated financial adviser. Not only can we help you avoid the downfalls previously mentioned, we can give you tailored, professional advice on the best way to access your pension to fit your personal needs. And, if you’re worried about the value of your pension, we can help you improve the way it works to potentially leave you with more money for retirement.

Here at Portafina, we are authorised and regulated by the Financial Conduct Authority (our company number is 754580), and we help thousands every year to access their pension. Get in touch today and we can talk you through your options.

1https://www.theguardian.com/money/2022/may/23/warning-to-over-55s-dont-raid-your-pension-pot-to-cope-with-inflation

2https://www.unbiased.co.uk/news/financial-advice/75-of-brits-fear-cost-of-living-crisis-will-impact-retirement-according-to-our-new-survey

3Tax treatment depends on your individual circumstances and may be subject to change.

Thinking about your pension options?

Regulated and authorised by the FCA, we can help you to make the best possible decisions when it comes to your pensions.

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.