Pension UK: The key issues to consider when accessing pension savings | Personal Finance | Finance
Pension saving is undertaken by millions of Britons each year as they move closer to their retirement. While the State Pension and workplace arrangements can often provide help during later years of life, many people prefer to undertake their own saving in addition, to ensure they have enough to get by. This is usually done through private pension saving, enabling people to build up a substantial pot by the time they choose to leave their working lives.
In a similar way, when accessing a pension a person could end up losing the tax relief available on future pension contributions.
Tax relief can be gained on private pension contributions which are worth up to 100 percent of annual earnings or £40,000 annual allowance – whichever is lower.
Unused allowances can be carried forward from the previous three years, however, there is an exception to note.
If individuals have a defined contribution arrangement and begin to draw money from it, they could end up triggering the Money Purchase Annual Allowance.
For the 2020/21 tax year, the MPAA stands at £4,000, so it is important to think carefully, or risk losing out.
The lifetime allowance for the current tax year is £1,073,100 – which is unlikely to affect most – but action should be taken if pension savings approach this amount.
Accessing a pension pot could also have an adverse affect on means tested benefits – claimed by millions of people right across the country.
If an individual claims any benefits which are related to income or savings such as Income Support, they could stand to lose out on these if they access their pension.
And finally, if a person chooses to withdraw and then reinvest at a later date, this might not be in their best interest.
This is because reinvestment could leave Britons putting their money back into an alternative arrangement which may have higher charges, or different requirements to meet.
As a result, anyone who is thinking of accessing their pension pot is urged to think carefully, to avoid making a short-term decision which could affect them in the long-term.
Britons are advised to consult with a pension adviser who could provide them with more information regarding their specific circumstances.