Kay Ingram: When you find a new job ask about the pension scheme and join as soon as possible
Kay Ingram is director of public policy at national financial planning group LEBC.
With unemployment rising, many individuals face an uncertain future.
While you look for new opportunities it is important to consider longer-term income needs and how pensions should be handled.
1. Find all your old pensions
Leaving your job does not mean losing your pension savings. While workplace pensions are funded by employers, they belong to the employee after the employment ceases.
Keeping track of older workplace pensions can be tricky; it is estimated that there are nearly £20billion worth of unclaimed pensions in the UK.
For some of those made redundant, taking time now to track down old pensions could be very worthwhile.
The Government’s free tracing service is here. Beware others you might find when doing internet searches, as they could charge you or be fraudulent.
2. Work out a way to keep saving
If you are planning a longer break from work to care for family members, try to keep some pension savings going.
Non-earners can pay into pension plans and get a boost to their savings. HMRC automatically adds 20 per cent to the savings made so that every £8 saved becomes £10 for savings of up to £2,880 per year.
You can either open a personal pension, or some workplace pensions can continue to receive payments direct from a bank account and many may remain open with as little as £20 per month paid in.
This can avoid big gaps in pension savings, which is a mistake women with family care responsibilities often make and a major cause of the gender pension gap.
Strapped for cash: If a firm offers to help you access your pension before you are 55, then it is more than likely a scam and should be avoided
3. Join up again when you get a new job
When you find a new job ask about the pension scheme and join as soon as possible. All employees aged 22 to 66 who earn £10,000 per year or more are automatically enrolled into an employer pension scheme.
The employee pays 4 per cent, the Government 1 per cent and employer 3 per cent of eligible earnings into your pension.
Employees can opt out but will lose the employer contribution and tax subsidy if they do, so avoid this false economy if you can.
Many employers offer more than this statutory minimum, which costs the employee nothing – and lower earners, under 22s and over 66s can still request to join.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
4. Think twice before deciding to retire early
If you are thinking about early retirement, get financial advice on whether this is feasible and the best way to access retirement income in a sustainable way.
While retirement from age 55 is possible, it may not be sensible if it means that income will run out later in life.
Other solutions to a short-term income drop should be considered too, such as tapping other savings first.
Withdrawing pensions before state retirement age (currently 66) can make the individual ineligible for benefits they would otherwise get if the pension was left untouched.
Those under 55, unless in terminal ill health or in a special occupational category (a sportsperson, or someone in the armed forces, for example) cannot usually access pensions without incurring heavy tax penalties, which may wipe out a lot of the fund.
If a firm offers to help you access your pension before you are 55, then it is more than likely a scam and should be avoided.
5. Don’t withdraw too much after you are 55
Once you are 55, pension schemes can be accessed but care needs to be taken to ensure that the tax charged on withdrawals is not excessive.
While up to 25 per cent of most pension funds can be withdrawn as a tax-free lump sum, any amount drawn over this is subject to income tax.
A large withdrawal can take the individual into a higher tax bracket, so planning taxable withdrawals spread over a period may provide more net income.
HMRC also taxes one-off withdrawals as though they are the first in a series of monthly payments. This results in too much tax being deducted at source, which you can reclaim using form P55 or form P53.
6. Avoid tax trap which limits future pension savings
Anyone who plans to resume building their pension needs to take great care not to limit their future savings opportunities by taking more than the 25 per cent tax-free cash.
Even £1 over the tax-free amount can trigger a reduction in future pension savings allowance to no more than £4,000 per year.
This little understood rule makes it difficult to rebuild retirement income. Taking financial advice, or free guidance from Pension Wise, prior to accessing pensions can avoid these traps.