Take Pension Early to Cover Cost of Living Increases Warning
Published / Last Updated on 30/08/2022
A warning when taking your pension early to cover higher living costs.
Inflation and the cost-of-living increases, in particular for fuel and energy are hurting most of us. Some people are saving, some are making cutbacks, others are downsizing their homes, and some are accessing their pension funds early.
Make accessing your pension your last resort.
For most people at retirement, you will usually get a pension fund drawdown option and/or pension annuity income option and a choice to take a lump sum. For investment linked pensions the lump sum is usually 25% of the fund value.
The issue is if you start drawing down any of the remaining 75% of the taxable part of your pension. Apart from being taxable, if you have income above your personal tax allowance (£12,570 currently), it also triggers the Money Purchase Annual Allowance.
Money Purchase Annual Allowance (MPAA)
For most people that have not accessed their pension fund, the maximum you and you employer can pay into a pension each year is either the lower of your salary and a £40,000 pa annual allowance cap. Once you have accessed the taxable part of your pension fund, the combined maximum both you and our employer can pay into a pension if just £4,000pa (the MPAA).
Impact
If you access your pension fund today to pay higher bills with a plan to then pay more into your pension fund later to make it back up, you may face restrictions on how much you can pay in if you have triggered the MPAA. You may then struggle to build pension funds back up to compensate for early withdrawals.
Try and Cutback
We know much has been said about budgeting, but we all need to look at our monthly spending and make savings were we can as energy prices, without government intervention, are going to be huge for the next few years.
