In the wake of the Covid-19 pandemic, you may be thinking about your pension and whether you need to make any change to your plans regarding the SIPP which you have with IPM – in particular, if you are aged 55 or over, whether now is the time to either access your pension savings for the first time or take additional income from your SIPP if you have already begun drawing down funds.
The last few months have brought about a great deal of upheaval and uncertainty. Stocks markets have experienced a level of volatility resulting in many investments losing a significant amount of their value. The impact of these developments have been felt right across the financial sector and the economy as a whole, and at an individual level many people will now be considering how they react to protect their financial position.
Even at the best of times, it is not easy to weigh up all the factors that need to be considered when making these decisions. The current situation brings with it a whole new set of circumstances to take into account, which makes it more important than ever that you make well-informed choices about your pension, as what you choose to do now will almost certainly have a bearing on your retirement income in the future.
To help you decide what course of action is best for you at this time, IPM has put together the following ‘Q&A’ which aims to bring to your attention some of the key things you need to think about when planning on what to do with your SIPP.
1. Have you received advice from an FCA regulated financial adviser regarding taking retirement benefits?
IPM always recommends you take independent financial advice from an FCA regulated advisor before making any decisions on pension planning.
A financial adviser is able to assess your personal and financial circumstances carefully and give you a personal recommendation as to what you should do to best serve your interests. A financial advisor has the knowledge, skills, insight and experience to look at how the overall economy and financial markets are performing and consider this alongside factors specific to you such as your investment objectives, current and future income requirements, existing pension assets and attitude to risk, in order to come up with the best solution that works for you.
Please note – IPM is simply the pension scheme administrator – we do not have the authority or expertise to give you financial advice.
To help you find a financial advisor please visit: https://www.fca.org.uk/consumers/finding-adviser
2. Have you taken guidance on retirement benefits from Pension Wise?
Even if you do not want to obtain advice from an independent financial advisor, you can still receive pension guidance tailored to your individual circumstances from Pension Wise, which is a service provided free of charge by the government.
By contacting Pension Wise, you will receive information on the options available to you regarding your pension savings and retirement benefits. Pension Wise will look at your personal situation and advise you on the choices that best fit your position in the current climate.
Visit the Pension Wise website at https://www.pensionwise.gov.uk or call 0800 138 3944 to book a free appointment with one of their advisors.
3. Do you wish to take benefits from your SIPP for any other reason than providing you with an income in retirement?
Always keep in mind that your pension is there to fund your expenses in later life when you no longer wish to work or when you are not able to earn an income to live on.
There are repercussions that come from taking too much money out of your pension too quickly which may risk the level of income your pension can pay out to you falling dramatically further down the line – or even running out entirely.
This is especially true if stock markets fall, which is what we are seeing now as part of the fallout from the Covid-19 pandemic. The drop in investment values in many areas may affect how much money is available for you to take from your pension at the moment, so by responding to the crisis with the decision to withdraw funds from your pension, it is possible that you will not be getting the maximum which your pension could potentially offer you.
At the same time, there is no guarantee that the decline in investment values is a long term trend, as once the crisis has passed it may well be that markets recover and investments regain much of the value they have recently lost.
What this all means is that you should be aware that making decisions based on short terms considerations can have effects on your financial wellbeing in the long run. There is the risk that by accessing your pension savings now in response to the current situation you end up locking in the losses brought about by Covid-19, as not only do you get less income from your pension now but also you leave fewer funds in the pension to generate a future income for you to take later on.
4. Have you thought about the tax implications of taking retirements benefits and sought tax advice on this issue?
You can take 25% of the value of your pension pot tax free, but any withdrawals above that are deemed as taxable income and accordingly will be subject to income tax.
You should therefore consider your own personal tax circumstances and think about what is the most tax efficient way of accessing your pension savings, to help ensure that as much of the money in your pension comes to you as possible. By taking a large amount of your pension income in one go, it may be the case that more it is deducted as tax compared to if you take it in smaller stages.
Furthermore, taking a taxable lump sum from your pension could have an impact on the overall amount of tax you will pay – for example, depending on the amount withdrawn, it may put you into a higher tax bracket than you would normally be in and any income you receive from other sources will be subject to greater tax deductions.
5. Are you thinking about accessing your pension savings to alleviate financial hardship, pay off debts, or simply to fund your present lifestyle?
It is worth repeating the point that your pension is designed to provide you with an income throughout your retirement until you die.
It is there to support you for the long term – consider that, on average people today aged 55 will live to their mid-to-late 80s, so you may need your pension to pay out money to sustain you for a period of 30 years or more during which your potential to earn an income independently will likely be waning.
If you need to get your hands on money now because your income has dropped or you have to pay off debts or because of other commitments you have or lifestyle choices – whether or not these have been brought about by the Covid-19 crisis – you may be better placed looking at other options before you decide to draw upon your pension savings. For example, if you have savings in a bank account where there are no penalties for making withdrawals, then this may be a preferable source of income compared to the long term risk that comes with having to fall back on your pension.
If you are suffering financial difficulties because of the Covid-19 outbreak and this is the reason for you thinking about taking income from your pension, you can find details of the alternative financial support being made available by visiting the Money Advice Service website here:
https://www.moneyadviceservice.org.uk/en/articles/coronavirus-what-it-means-for-you
For information on how to obtain free debt advice, please visit:
https://www.moneyadviceservice.org.uk/en/tools/debt-advice-locator
6. Is it your intention to take money out of your pension to invest it elsewhere to achieve greater potential returns?
With stock markets and other conventional investments currently in a state of flux, it is tempting to move your money out of your pension to invest it in alternative investment schemes which promise better rewards.
Unfortunately, however, it is a sad truth that many such investment schemes are operated by scammers who specifically target people who are able to take large sums of money out of their pensions. Although they often appear to be legitimate, the investments they offer often turn out to be illegal or inappropriate and in such cases
you risk losing all of the money you put into them with no way of recovering it.
Many people have fallen victim to scams of this nature and the end result, of course, is that they have lost their entire pension savings built up over decades and are left with no provision for when they retire.
You should be aware that scams may operate in the investment market that you are entering if you taking your pension benefits to invest them elsewhere. The Financial Conduct Authority recommends 4 simple steps you can take to protect yourself from pension scams:
- Reject unexpected pension or investment offers whether made online, through social media or over the phone.
- Check who you are dealing with before committing yourself to any action – check the FCA register or call the FCA helpline on 0800 111 6768 to see if the person you are dealing with is authorised by the FCA.
- Don’t be rushed or pressured into taking any decision about your pension or your money and investments.
- Consider getting impartial information and/or advice – for example by visiting https://www.pensionsadvisoryservice.org.uk/contacting-us
You can find out more about how to identify scams here: http://www.pensionsadvisoryservice.org.uk/publications-files/uploads/Pension_Scams_-_members_detailed_booklet.pdf
7. Have you considered the different options that are available when you come to take retirement benefits?
There are a range of different ways in which you can take retirement benefits and it is important that you are aware of the various possibilities so that you can assess which is the best choice for you to make.
The IPM Personal Pension Scheme cannot offer you the full range of retirement options. What we suggest you do, therefore, is before you decide to take income from your SIPP you look at what other options are available to you.
8. Have you considered taking independent advice regarding the purchase of an annuity?
Purchasing an annuity with some or all of your pension fund could provide you with a fixed, guaranteed regular income for life.
This may be a preferable solution for you as it would go some way to negating any uncertainty as to how much your pension will pay out to you and for how long, although on the other hand it potentially offers less flexibility and if market conditions are poor when you purchase the annuity you may have to settle for terms that mean you receive less money overall than if you had chosen a different alternative.
9. Are you in ill health and/or do you have any financial dependents?
Funds held within a Registered Pension Scheme such as the IPM Personal Pension Scheme do not form part of your estate in the event of your death and are therefore not subject to inheritance tax.
As such, you should take this into consideration as part of your tax and estate planning – whether it is more tax efficient to keep your money within the pension wrapper or take it and have it make up part of your estate.
Once you have taken benefits out of your pension fund they will form part of your estate. In the event of your death before age 75, however, funds that are still within a Registered Pension Scheme can be paid to your dependents free of tax.
10. Do you plan on making any further savings for retirement?
The amount you can contribute to a Registered Pension Scheme in future may be significantly reduced if you take certain benefits from your pension fund now.
If you plan to take some (or all) of your pension now, but still intend to save more into a pension in the future, you should be aware that you can continue to receive tax relief on contributions paid in up to age 75, but you can only save up to £4,000 a year before you are taxed. Your ability to build up your pension pot again will therefore be much compromised.
11. Are you in receipt of any state benefits?
Taking cash withdrawals may have implications if you have debt or if you are or may be entitled to means-tested benefits. If you are concerned about this aspect you can contact Pension Wise, the Citizens Advice Bureau, or the Money Advice Service.