Pension: Savers should bear these key risks in mind when managing their pot

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Pension saving is often undertaken by many people, whether it be through a private arrangement, or through auto-enrolment at work. However, undoubtedly, financial circumstances have been altered for a large number of people due to the COVID-19 crisis. As a result, many will be reviewing how they currently manage their pension savings, and may be looking to make changes. 

It is vital to consider how alterations to how a pension pot is managed could affect a person later down the line.

To find out more, Express.co.uk spoke to Jackie Leiper, Managing Director of Workplace Savings and Contributions at Lloyds Banking Group about managing pension savings.

She highlighted the issues often faced by savers, particularly when it comes to the lockdown crisis.

There are also risks involved when it comes to pension freedoms it is important to keep aware of.

Ms Leiper said: “There are particular risks invovled, for instance dipping into your pension pot earlier than retirement – which some may be thinking of doing during this time.

“If you start taking money earlier than you have planned, you are likely to run out of money in retirement. That’s whether you take small amounts out, or even a lump sum.

“It simply means there is less pot to spread over the years of your retirement, making things more complicated.”

Ms Leiper also drew attention to the risk of crystallisation, which can limit how much a person can save back into their pension later down the line.

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She added: “The Money Purchase Annual Allowance is actually there to stop people playing the system and washing money back for the tax relief.

“But if you were to inadvertently blunder in, take money out and crystallise, you might find you can’t make this money back afterwards. It is very low, and for the 2020-21 tax year, MPAA currently stands at £4,000.”

However, another issue likely to arise with pensions during the lockdown crisis is stopping contributions altogether.

Some have found their income squeezed, whether through furlough or job loss, and so have chosen to halt paying in – either to private or workplace arrangements.

But with auto-enrolment, Ms Leiper highlights, stopping payments can be a significant issue.

She said: “Auto-enrolment means if you spend £4, you get £4 back – £1 from your employer, and £3 from the government. That’s doubling your money and an absolute no brainer.

“Stopping contributions, then, can have a significant impact. Remember, you might be saving £4, but you will be losing £8 of investment – that employer contribution and that tax relief.

“Because of the way the pension system works, stopping contributions could have a negative effect you may not be able to make up further down the line.

“Consider reviewing other things, such as saving on your energy bills or cutting your phone bill as stopping contributions are not going to be beneficial for anyone in the long term.

“Making a short term decision is likely to really cost you later down the line, so think carefully.”

Pension pots should be considered as a sum of money to put aside for later life, Ms Leiper concluded.

Viewing the pension in any other way is likely to cause unnecessary risks to a comfortable retirement.

She said: “I would be saying to everyone your pension is your retirement money. Full stop. You should be looking at absolutely every other avenue before either accessing your fund, or stopping contributions.”

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