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Should You Make Changes to Your Pension During COVID-19?

If you are one of the thousands of people who have been economically affected by the pandemic, you may be considering pausing your pension contributions or accessing your pension early to free up some capital.

However, before you take this step, it’s important to consider the impact that a decision you make now will have on your long term outlook. Chances are it’s going to take a long while for the economy to recover which in turn will make it difficult to make up for any shortfall that your pension pot has suffered as a result of decisions you make now.

Data has shown that many people over the age of 55 have accessed their pension early since lockdown began. However, experts strongly recommend you access any other available assets before using your pension. You also need to consider the implications of selling any stock within your ISA or pension as they will have no doubt been negatively affected by the recent fall in the market. If possible it is best to give the market time to recover before you consider selling.

It goes without saying that if you are struggling to make ends meet now, then pausing your contributions makes sense, provided you don’t have any other liquid assets you can access. Lowering your contributions is another, less drastic option.

It’s important that you give this some consideration before taking any steps. Hargreaves Lansdown have estimated that a millennial saving 6% of their salary into a pension with a matching employer pension contribution could be tens of thousands of pounds out of pocket in retirement as a result of halting contributions for 12 months now.

You should also be aware of the tax implications of any actions you take. Whilst withdrawals from your ISA are tax free, only the first 25% of your pension is tax free, after which you will pay income tax at the highest rate. It is also worth checking if you have already used your personal tax allowance, as if not you could draw a taxable income from your pension. Also, for those lucky enough to still be benefiting from employer contributions then any money you draw from your pension now will restrict the amount you are able to pay into your pension henceforth to a max of £4,000 per annum.

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