During the spring lockdown, it was the oldest and the youngest workers who were most likely to be furloughed. In fact, data released by the Office for National Statistics (ONS) found that between April to June 2020, the number of those aged 65 and over in employment decreased by a record 161,000 to 1.26 million.
Clearly, the lockdown, and subsequent recession, is hitting older workers harder. While younger workers may benefit from planned Government initiatives such as the Kickstart Scheme to help them back into work, those aged 50 and over face a challenging environment for returning to work. With years of work behind them and, hopefully, a substantial pension savings pot accumulated during that time, some over-50s may start considering taking early retirement over re-entering the workforce if made redundant.
In the latest in our series on redundancy, we’ve looked at whether those aged over 50 who have been made redundant should consider taking a pension drawdown.
While this article provides information, those thinking about taking a pension drawdown should, ideally, first speak to an independent financial adviser.
Before considering taking a pension drawdown, retirement savers should be aware of the impact the Coronavirus pandemic has had on their pension pots. At the beginning of the crisis, the stock market began falling, which although in subsequent months has seen the market rise, it still remains volatile and could have resulted in significant losses to pension funds, depending on how the fund was invested. As such, pension savers thinking about taking early retirement or taking drawdown from their pensions should consider how much they have lost in their funds since the pandemic began impacting the world’s economy before making a decision.
Usually, the earliest pension savers can take a pension drawdown is 55, but it will depend on the pension provider and so those thinking about taking a pension drawdown should contact their provider if they are not sure.
Normally, up to 25% of the entire pension pot can be taken as a tax-free lump sum. Saying this, some older pensions may allow a slightly higher tax-free amount to be taken, so it is advisable to contact the pension provider to find out if this is possible.
With pension freedoms, which was introduced in April 2015, there is no limit on how much money can be taken as a drawdown from the pension fund.
Once the tax-free sum of 25% has been reached, all additional money withdrawn from the pension fund will have to pay income tax. This means that money taken within the personal allowance – currently the standard personal allowance is £12,500 – and amounts over this (and over the 25% tax-free sum that does not impact the personal allowance) is taxable and the amount depends on individual’s total income for the year and their tax rate.
For those thinking about taking pension drawdown, it is possible to draw down and continue working. Saying this, it is important to keep in mind the limits on how much can be added back into the pension fund and how this may impact the type of pension held. Getting expert advice from an independent financial adviser will help to ensure whether this is the right choice to make.
Yes, it is still possible to continue saving into a pension once drawdown has been taken. But, once drawdown has been taken, the amount that can be saved into the pension falls from £40,000 or 100% of earnings, whichever is lower, to just £4,000 per tax year. As well as this, additional tax may be added to money saved into the pension once drawdown has been taken.
It is important to remember that the money in pension pots needs to last for the individual’s lifetime. As such, taking drawdown too early, especially if this has not been planned for when initially planning for retirement, could lead to running out of money later in life.
Over-50s looking to boost their income if they are facing retirement or having to switch to part-time work due to the pandemic can consider a range of options. For example, eligible homeowners can consider equity release or those with substantial savings could consider investing in a buy-to-let property. As always, it is important to get independent financial advice before deciding on any option, as whatever choice is made can have serious financial implications later in life and on the inheritance left behind.
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