During 2020, many customers came to us with their questions and concerns around pensions and retirement.
Here we talk to Christine Ross, Head of Private Office (North) and Client Director at Handelsbanken Wealth Management, about a number of the issues raised.
Viewpoint team (VT): Hi Christine, so – what a year! How have retirement plans been affected by the pandemic?
Christine Ross (CR): A number of customers had been planning their retirement (or at least partial retirement) to coincide with the sale of their family businesses. In many circumstances, buyers have dropped out and customers have had to shelve their plans and keep on working to maintain the value of the business in the hope of finding a new buyer. In many cases the business is the pension.
In other instances, customers have decided to keep on working beyond the date they had planned to retire. I am aware of instances where individuals who are still working have accessed their personal pension arrangements earlier than anticipated in order to bridge the income gap until their earnings return to pre-pandemic levels. Some will have accessed the tax-free cash element to meet the income shortfall.
Others have become increasingly concerned regarding the safety of their defined benefit pensions where they believe the employer is struggling. Whilst I have not seen any rush to transfer, I have seen an increase in the number of enquiries regarding pension security.
VT: OK – lots of reassessing going on. What advice would you give a customer, say in their late fifties, who has decided to take early retirement and has a number of pensions, as well as ISAs and cash savings?
CR: Well while pensions tend to be the main source of retirement income, many savers also use ISAs and other investments to provide for later years. The main issue is where to draw from first and what are the implications of each decision. Assuming that the pensions and ISAs are invested rather than in cash, and that the pensions are not defined benefit company schemes, a key point to consider is whether these have recovered fully from market falls. Drawing on funds that are at a depressed value will have a greater impact on savings in the longer term.
Then there are tax issues to consider. Both pensions and ISAs offer tax free investment growth. You can withdraw money from an ISA tax free. When you draw on your pension, you can take up to 25% of your fund as a tax free sum (subject to the lifetime allowance which is currently £1,073,100).
Withdrawals above this level would be subject to income tax at your highest rate. You can choose to draw only tax-free cash if this is not required for any capital expenditure. Alternatively you could draw an income made up partly of tax free cash together with some taxable pension.
Whilst meeting your income requirement this will also be tax efficient, perhaps allowing you to remain in a lower tax category. If your earnings in the current year have been low you may not have used your personal tax allowance fully, in which case it might be worthwhile drawing only taxable income which could be offset by the personal allowance (£12,500 currently).
Finally, pension funds are held outside of an estate for inheritance tax (IHT) purposes and can be inherited by the nominated beneficiaries. If IHT is a consideration then the pension, at least from a tax perspective, should be the last port of call.
VT: And how has the pandemic affected younger people’s pension savings plans?
CR: I have seen an acceptance by younger people that they will just have to defer pension funding for the immediate future. Whilst there is an awareness that this will impact their future retirement, it appears to be a lesser priority for now with the main focus on paying the mortgage. In some cases parents are able to step in and regard the continued funding of their children’s pensions (and ISAs) as an efficient form of estate planning for themselves. For example, some parents have funded a non-earnings related contribution of up to £3,600 to maintain an element of their children’s pension saving…
VT: OK so do you expect pensions to landscape to evolve in a post-pandemic world? And is this likely to affect plans in the longer-term?
CR: There has been much speculation recently regarding the future of pension tax relief. It is generally accepted that the financial support provided by government during the pandemic will have to be repaid, possibly through higher taxes. It is possible the Chancellor may decide to tackle the issue of pension tax relief at the same time, perhaps with a lower flat rate, further impacting the total level of pension saving.
Looking further ahead, with businesses in some sectors striving to maintain jobs and return to profitability it is possible that some employer-sponsored pension schemes may be less generous in future. This will put even more pressure on individuals to take personal responsibility for their pension saving. All of these factors will potentially lead to people having to either devote more of their income to pension saving, work longer or accept that they will retire on a lower income than they had planned for.
To find out more about how we can help you with your retirement, tax and inheritance planning, please contact your relationship manager.
You may also find out more by visiting our website: wealthandasset.handelsbanken.co.uk.
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