The Government's enforced lockdowns, tiered systems, social distancing and restricted capacities have led to many normally successful businesses in the Hospitality, Leisure and Tourism sector struggling to keep their heads above water in these challenging times. Often these businesses are a labour of love and even the thought of closing them down temporarily can be heartbreaking for those concerned, but many owners will be wondering how they will be able to keep paying their own personal bills through the winter months.
Since 2015/16, the introduction of pension freedoms has been a huge benefit for the over 55’s, allowing thousands of people to now draw income from their pensions flexibly. A pension now offers the ability to take a more phased approach to retirement rather than buying your income all in one go, such as with an annuity. This emerging trend is seeing more people gradually reduce their working hours and blending a balance of work and leisure time to maximise their income and the benefits they may receive.
Some business owners may be tempted to access an income from their pension where they have been prudent to build up a retirement pot over their working lives, however, where this is being considered, the right advice and support is crucial. In certain circumstances this could help someone through a crucial period until the Spring of 2021, when many people hope we will have finally turned the corner in the fight against COVID 19 and we return to some normality. At that point, there is the potential to reduce or even switch the income off again once their business is back up and running. Equally, taking this approach, depending on someone’s circumstances, it could be the wrong thing to do, hence why advice and support around this area of financial planning is crucial.
Advice is important, as whilst there are clearly benefits of taking this course of action, there are also consequences to consider.
The obvious point to make is that a pension accessed sooner could run out more quickly. Typically your money is invested in a mixture of assets including equites which have seen sharp falls in the early part of this pandemic, therefore your pension pot could have fallen in value, giving you a smaller pot to draw from. If you planned to retire at 65 but start to take your pension at 55, the pot will have to last longer.
Another downside to accessing a pension early is limiting the potential to make future sizeable pension contributions. Your annual allowance (the total you can pay into all pensions per year) drops from potentially up to £40,000 down to £4,000. Don’t forget that taking withdrawals from a pension count as income so are taxed as income, therefore any action in respect of accessing a pension pot does need careful financial planning, advice and support.
The flexibility that pension freedoms provide does mean that older workers can tailor their pension income to their own individual requirements, giving rise to a new work/life balance. As noted earlier, this now includes the opportunity to switch an income on for only a few months, or to take an ad-hoc lump sum withdrawal, to help someone through a specific period or to fund a significant purchase or spend.
Pension freedoms have allowed many people aged 55 or over to throw off the shackles of a traditional retirement and follow a plan that suits their individual needs and circumstances. While historically people benefitted from generous final salary pensions, one drawback of these was that they didn’t offer the same flexibility to decide how and when to take benefits, however, they did and still do, offer extremely valuable secure income.
Clearly flexible access to pensions has changed the way people think about their retirement and is now enabling the rise of a more flexible transition into later life, including allowing people to choose to start accessing some retirement savings to support a reduced working pattern. However, not all schemes will allow this flexibility, especially older style personal pensions. This is another reason why advice and support from a regulated financial adviser is vitally important.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind. We provide personalised financial planning to suit your individual circumstances. We may be able to help you explore options you hadn’t previously considered, or prevent you from making mistake in this what can be a complex area of financial planning. We will explain, in a jargon-free way, the pro’s and con’s of different courses of action available to you and then, where appropriate, provide regular reviews to help keep you on track.