Pension advice and the COVID crisis
Featured Products Promotional FeaturesPosted by: Dental Design 17th July 2021
The UK has recently seen a rapid rise in the number of people accessing their pension pots. HMRC figures show that in the first quarter of 2020, the number of people using flexible pension withdrawals (i.e., drawdown) rose by 23 per cent compared to the first quarter of 2019. [i]
A combination of financial pressures triggered by the COVID-19 crisis is likely behind this continuing trend, and although many are seeking advice on accessing pension savings early, many are not – and may be risking their long-term security as a result.
While accessing pension savings early for those aged 55+ has been permitted since the dawn of Pension Freedoms in 2015, [ii] for self-employed dentists saving for their retirement it is clear that support is needed in order to make the decisions on whether accessing your pension pot early is the right thing for you in these challenging circumstances.
Why are more people turning to their pensions in the COVID-19 crisis?
Self-employed dentists have faced significant uncertainty during the COVID-19 outbreak. The financial support measures issued by the Chancellor have been criticised as insufficient for the majority of self-employed dentists, [iii] particularly for those not eligible for the means-tested Self-employment Income Support Scheme[iv] – meaning many are feeling a strain on their finances.
Additionally, many self-employed dentists will have family members whose finances will have been affected by the pandemic, and may be looking for ways that they can support them to bridge the gap in their income.
Furthermore, for some the pandemic has triggered concern as the stock market has fallen considerably and hit their defined contribution pension savings hard.[v] While it’s important to remember that pension savings are long-term investments, and the more you invest the more you’ll benefit if stock markets recover – this dip has led some individuals to think about withdrawing their pension early.
The risks of making early pension withdrawals
For those self-employed dentists facing financial difficulty, flexibly withdrawing from your pension could appear a good option to ease financial burdens in uncertain times. However, making decisions about your pension based on short-term events and circumstances can compromise the longevity of your pension savings, while also presenting significant tax implications and potentially leaving you vulnerable to scams.
Tax implications
From 6 April 2015 the rules on how you could access your defined contribution pension savings changed, meaning that from the age of 55 you can access as much of your pension savings as you wish.[vi]
While you are normally able to take up to 25% of your pension pot tax free, if you take more than 25% there will be tax implications to consider [vii] as you’ll pay tax on the rest as if it were income.[viii] Also, if you take out a large amount of your pension in a tax year you could be pushed into a higher tax bracket and be required to pay more tax than you would have done if you’d taken smaller amounts over a longer timeframe. In addition, accessing your pension savings now could mean you miss out of any increase in value if markets recover from the impact from COVID-19, and also limit how much you can pay into a pension in the future.
Therefore, it is advised that you consider all your income and savings sources, as withdrawing from your pension early can also impact eligibility to access income-related state benefits such as universal credit and pension credit, if ever needed in the future. viii
It is also worth highlighting that HM Revenue & Customs can tax up to 55 per cent on unauthorised withdrawals before the age of 55, while cashing in a pension early is usually only permitted if you are expected to live less than a year because of serious illness.[ix]
Beware of scammers
Unfortunately, your pension can become the target for scams or inappropriate investments. Data from Action Fraud has shown that there has been a 45% increase in reports of pension fraud during the first three months of 2021, compared to the same period in 2020.[x]
The Financial Conduct Authority and Pension Advisory Service have shared advice on how to stay vigilant towards scammers offering early pension release, such as ignoring or rejecting proposals from companies who approach you out of the blue offering a free pension review,[xi] checking who you are dealing with before you change your pension arrangements by using the FCA register,ii resisting being rushed or pressured to make any decision about your pension, and getting impartial advice/information from a trusted adviser.
The importance of seeking help
It is clear that seeking financial advice is vital to ensure you area able to secure and protect your finances, both now and for the future. money4dentists is an established and respected team of award-winning specialist independent financial advisers who work solely with the dental profession and who have a unique and thorough insight into the industry.
Working with you, they can help dentists to understand their pension plans and move forward in a way that is most beneficial to them, avoiding the potential pitfalls and ensuring that every financial decision made is the most beneficial.
For more information, please call 0845 345 5060 or 0754DENTIST.
Email info@money4dentists.com or visit www.money4dentists.com
Richard T Lishman
Managing Director of the 4dentists Group of companies
[i] Gov.uk. Flexible payments from pensions.https://www.gov.uk/government/statistics/flexible-payments-from-pensions/flexible-payments-from-pensions
[ii] The Money Advice Service. Pension release or pension unlocking. Available at: https://www.moneyadviceservice.org.uk/en/articles/pension-release-or-pension-unlocking [Last accessed 26.04.2021]
[iii] British Dental Association. Coronavirus: the financial impact. Available at: https://bda.org/advice/Coronavirus/Pages/financial-impact.aspx#associatesprivate [Last accessed 26.04.2021]
[iv] British Dental Association. Coronavirus: the financial impact. Available at: https://bda.org/advice/Coronavirus/Pages/financial-impact.aspx [Last accessed 26.04.2021]
[v] Which? Coronavirus: how to protect your pensions and investments. Available at: https://www.which.co.uk/news/2021/04/coronavirus-how-to-protect-your-investment-portfolio/#pension [Last accessed 26.04.2021]
[vi] Gov.uk. Pension flexibility: new options from 6 April 2015. Available at: https://www.gov.uk/government/publications/pension-flexibility-new-options-from-6-april-2015/pension-flexibility-new-options-from-6-april-2015 [Last accessed 26.04.2021]
[vii] The Pensions Advisory Service. Coronavirus – how will this affect my pension or investments? Avaiable at: https://www.pensionsadvisoryservice.org.uk/about-pensions/when-things-change/coronavirus-how-will-this-affect-my-pension-or-investments?_ga=2.94184665.594950111.1619379276-920858498.1619379276 [Last accessed 26.04.2021]
[viii] Citizens Advice. What you can do with your pension pot. Available at: https://www.citizensadvice.org.uk/debt-and-money/pensions/nearing-retirement/what-you-can-do-with-your-pension-pot/ [Last accessed 26.04.2021]
[ix] FT Adviser. Spike in savers looking to access pension before age 55. Available at: https://www.ftadviser.com/pensions/2020/04/30/spike-in-savers-looking-to-access-pension-before-age-55/ [Last accessed 26.04.2021]
[x] Action Fraud. Warning from Action Fraud to #ProtectYourPension as £1.8 million lost to pension fraud so far this year. Available at: https://www.actionfraud.police.uk/news/warning-from-action-fraud-to-protectyourpension-as-1-8-million-lost-to-pension-fraud-so-far-this-year [Last accessed 26.04.2021]
[xi] Financial Conduct Authority. Types of pension scams. Available at: https://www.fca.org.uk/scamsmart/types-of-pension-scam#early [Last accessed 26.04.2021]
