Pensions & Pandemics

Pensions have been an area of particular focus during the COVID-19 pandemic. Those in financial distress have sought to unlock pension assets in order to bolster their finances. Others have faced the impact of reduced pension contributions due to furlough or redundancy. A third group has used the downtime to review pensions, consolidate and in some cases increase pension contributions. At the same time, markets have been more volatile than in the recent past and many have faced the prospect of reduced pension savings and, for some, reduced retirement income.

Over the next few days, I will publish a series of short articles on LinkedIn with some thoughts on each of the situations, the potential pitfalls when it comes to pensions and how they might best be addressed.

Accessing Pensions Early

In times of financial distress, it is understandable that some individuals have turned to their pension savings to support themselves and their families. For many, their pension pot will be the biggest asset that they own and can go a long way to providing financial support for a few months. In the UK, it is possible for many to access their pensions from age 55, with 25% of their pension pot being treated as tax-free (higher in some cases). Similar arrangements exist in some other countries, and some governments have even legislated during the current pandemic to provide early access to pensions. 

While the opportunity to access tax-free cash may be appealing, particularly for those facing a loss of income, it is important to consider the longer-term implications of such a decision on your retirement. Pensions are designed to be accessed during retirement, and are not intended as a stop-gap measure during periods of unemployment. Accessing a pension early can have a disastrous impact on your retirement planning, something that can be compounded by volatile markets. 

Consider someone who took a pension lump sum at the stock market bottom in mid-March this year. They would have seen investment losses of anywhere between 10% - 30% and then realised some of these losses by taking a lump sum. The long-term impact of this decision when they reach their retirement in their mid- to late-60s could be a significant impact on their standard of living. In the UK, such a decision could also affect their ability to access state benefits during periods of unemployment. 

Taking all of this together, it goes without saying that anyone thinking of accessing their pension benefits early should consider seeking independent financial advice first. This will allow them to evaluate the potential impact on their retirement and explore other options that might be available to them. While there is a cost associated with such advice, seeking professional support can help avoid financial missteps that may prove much more costly further down the line. Advisers will often offer a free initial consultation or another option for those in the UK is the government’s pension service, Pension Wise.