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As the cost of living crisis continues, many Britons on low incomes may be struggling to keep up with rising bills. To cope with the rises, many may be tempted to dip into their pension, however there are longer term implications of doing so.
According to Wesleyan Financial Services research, 24 percent of Britons said they will dip into their savings and retirement pots to try and boost their income during 2023. Linda Wallace, Director of Wesleyan Financial Services explained why this may not be the best idea, and other ways Britons can achieve more income.
She said: “Don’t stop investing for your retirement.
“We’re urging people to carefully consider the longer-term implications of doing this – especially accessing pension savings. Taking money from a pension early can come with a significant tax bill, and potentially limit what you can afford to do when you do retire.
“Saving into a pension is a tax-efficient way to save for the long-term, which is particularly useful in the current economic landscape of high inflation, which will be eroding the purchasing power of your hard-earning savings.
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“If you can afford to, it’s a great idea to consider how you can maintain and increase your pension saving throughout next year. Getting into a habit of pension saving not only increases the options you have in retirement but saving into a pension is one way to help your money go further.
“For example, funds you put into retirement savings benefit from the government adding in an extra ‘share’ in the form of tax relief, and your employer may add a contribution too.”
If someone wishes to draw some or all of their pension from age 55 onwards, it’s crucial to pay attention to the tax liability before deciding to withdraw funds.
Everyone, once they reach 55 (or 57 as of 2028) can draw 25 percent of their pension as a lump sum without paying additional Income Tax, unless they’ve breached the Lifetime Allowance (LTA) which could come with a hefty tax burden.
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Set at £1,073,100, it is a limit on how much someone can save over their lifetime while still enjoying full pension tax benefits.
However, drawing more than 25 percent at once will likely incur income tax charges, and is added to any other income one may earn.
Drawing an amount above 25 percent of their pension pot could even push them into a higher tax bracket, making withdrawal very inefficient.
Especially if they’re accessing their pension earlier than they had planned to combat rising expenses in the cost of living crisis, being pushed into a higher tax bracket could deplete one’s hard-earned savings and incur further financial stress.
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To ensure people draw their pension as tax-efficiently as possible, Britons are encouraged to speak to a financial advisor.
If someone begins to take money from their pension pot, the amount that can be contributed while still receiving tax relief may reduce.
This is known as the Money Purchase Annual Allowance, or MPAA, and is worth bearing in mind. The consequences of triggering the MPAA can be significant, and experts have warned of the matter as savers enter 2023.
Helen Morrissey, senior pensions and retirement analyst, said: “If you have already started accessing your pension, then you trigger what is known as the money purchase annual allowance.
“This essentially decreases your annual allowance to £4,000. If you breach this allowance you could end up paying large fines.”
The MPAA was first introduced in April 2015, and impacts defined benefit contributions.
Ms Wallace explained how people make the most of any increases to income
While many may need to use any extra funds they secure to help meet higher costs, she encouraged individuals to consider how they can make their extra income work as hard as them.
She said: “One way to do this is to consider pensions salary sacrifice. This is where you and your employer agree to reduce your salary, and your employer then pays the difference into your pension. Despite having a lower salary, the tax benefits can actually mean your take home pay is higher, and you’re saving for your retirement.”
Wesleyan Financial Service research also revealed that over 20 percent of UK adults are also considering a “side-hustle” such as a second job or selling skills or products, alongside a full-time job.
Ms Wallace added: “It would be a good idea to invest this money and help it grow in value.”
With investing come risks.
