What to do with your pension if you are hard up or made redundant


People are living through exceptionally hard times, and matters are not going to improve for some while – they may get much worse.

When people are struggling to make ends meet, and worried about their jobs or already out of work, they will prioritise what bills they must pay – food and shelter come first.

If you are looking to make cutbacks during the coronavirus emergency, pension contributions are going to be on the block.

Emergency planning: Don’t panic, stay vigilant against scams, and keep paying in if you can afford it.

If you are in this situation, the important things to remember are:

– Don’t panic and make rushed decisions – we explain how you can mitigate the fallout from reducing or ending pension contributions for a time.

– Stay vigilant against scams – most importantly, reject any offer to help you access your pension before you are 55, because the chances are it is fraudulent, and you risk a huge tax bill which you will have to pay even if you’ve just lost your life savings. 

– Keep paying into pensions if you can afford it – try to avoid harming your chances of a comfortable retirement because of what might be a serious but short-lived setback to your finances.

If money has become tight due to the crisis, or you have lost your job, we look at the options for what to do about different types of pension below. 

State pension

The full state pension is currently worth £168.60 per week or around £8,800 a year, and once you reach the qualifying age you get guaranteed payments until you die.

As people increasingly have to rely on ‘pot of money’ pensions, and bear all the investment risk when building them up and drawing on them in old age, having a guaranteed income stream from the state pension is very important.

It’s therefore crucial to maintain your National Insurance record to ensure you retire on a full state pension, or as near to it as possible.

If you remain in work during the current crisis, your National Insurance contributions will be deducted automatically, no matter whether your other finances become strained.

Have you already retired? 

If you are already drawing a final salary pension or have an annuity, these are guaranteed for life and your payouts will be unaffected by the coronavirus crisis.

People who are living on the income from their pension investments in retirement can read our tips for coping with a financial market shock here.

But if you are made redundant, NI will stop being paid, so what do you do? 

You can make voluntary payments, backdated for six years, but the good news is that this might not turn out to be necessary.

‘Don’t panic,’ says former pensions minister Steve Webb, now a partner at consultant LCP. ‘We are now in March, so you probably have a qualifying year for 2019/2020 already.’

He suggests you double check it on the Government’s state pension forecast tool this summer, when updated records are available, to be sure. 

Read more here from Webb on how qualifying years for the state pension are worked out. 

‘For 2020/2021, you have six years to fill the gap so there is no urgency,’ he goes on. ‘Also, remember you need 35 qualifying years for a full state pension.’

That means, if you are many years away from retirement, you might judge you will end up with a full record anyway, and don’t need to make voluntary top-ups. Also, you have six years to think again, and make them later.

But Webb adds that if you are close to retirement, and were contracted out of the second state pension or SERPS during your career, it is important to check your record. Read his guide to state pension top-ups here. 

‘Pot of money’ pensions

Most people in the private sector have this type of pension, known in industry jargon as ‘defined contribution’.

They are stingier and riskier than old-style final salary pensions, because savers bear the ultimate responsibility for building them up, though employers and the Government pay into them too.

Kate Smith:  'Some pension schemes give people the flexibility to keep on saving'

Kate Smith:  ‘Some pension schemes give people the flexibility to keep on saving’

Under the auto-enrolment rules, all workers get signed up for such schemes unless they actively opt out.

If you are short of money right now, it might be tempting to leave, but you should avoid this if possible so you don’t damage your future pension prospects.

The Government’s emergency help for employers during the current crisis includes supporting their pension contributions into individual workers’ pots.

Meanwhile, if you are made redundant, you might be allowed to continue paying into your existing pension scheme, assuming this is allowed and you can afford it.

If your DC work pension scheme is run by an external pension firm on a ‘contract’ basis this will be permitted, but not if it is run in-house by a board of trustees.

Kate Smith, head of pensions at Aegon, explains: ‘When employees are made redundant, future personal and employer pension contributions cease being paid into workplace pensions. However, some pension schemes give people the flexibility to keep on saving.

‘Contract-based schemes, also known as personal pensions, run by pension providers, give people total flexibility in how regularly they pay pension contributions to suit their financial circumstances.

‘These types of pension scheme also allow people to continue to pay pension contributions even if the link has been broken with the employer who set up the scheme.

‘This is because personal pensions are in the individuals’ name and the contract is between them and the pension provider, not the employer.’

Smith says that is is also possible to pay redundancy money into personal pensions at any time and get tax relief on it, although there is a cap on the amount that can be paid in – your annual earnings, up to £40,000 a year.

‘If people don’t have any earnings, it’s still possible to pay in pay in up to £3,600, including tax relief,’ she adds.

When it comes to trustee-run work pension schemes, you can’t keep paying in after being made redundant.

‘As soon as the connection with the employer is broken, no further personal contributions can be paid in,’ says Smith.

‘Redundancy payments can normally only be paid as pension contributions into occupational pension schemes while people continue to be paid by their employer.’

If you can’t use your old work scheme but still want to pay into a pension before you get another job, you can set up a Self-Invested Personal Pension with a financial provider and operate it yourself. 

Steve Webb also suggests using the state-backed pension provider, NEST, designed to be a cheap and simple alternative for employers when auto-enrolment was launched, and which is open to the self-employed. Details about joining NEST are here. 

Meanwhile, if you are worried about the impact of the financial crash on your pension investments to date, Webb offers further advice here. 

Final salary pensions

These are the most generous and safest pensions available, because after retirement they pay a guaranteed income for life. They also pay a reduced income to your spouse or civil partner if you die before them.

Also known as ‘defined benefit’ pensions, most in the private sector closed to new contributions ages ago, but those in the public sector remain open.

If you are still working but getting into financial difficulties – perhaps because a partner has lost income or their job – you should try to stay in a final salary scheme if at all possible.

Susan Waites:  In many cases stopping contributions will result in an employee opting out of a DB scheme, and they may not be able to rejoin

Susan Waites:  In many cases stopping contributions will result in an employee opting out of a DB scheme, and they may not be able to rejoin

Consider things very carefully before making a decision to leave, and call the scheme beforehand to ask questions about what it might mean – including whether you will be allowed to rejoin later.

If you are worried about your employer going bust in the current crisis, bear in mind that if this happens the Pension Protection Fund will step in to save your final salary pension.

If you are not yet retired it covers 90 per cent of your payouts, up to a fairly substantial annual cap, and if you are already retired it pays out in full.

Susan Waites, a partner at pension consultant Hymans Robertson, says: ‘Employees in DB schemes are unlikely to be able to reduce their contributions.

‘They should think very carefully before stopping contributions and check with their employer.

‘In many cases stopping contributions will result in the employee opting out of the DB scheme and in most cases (other than public sector schemes) they are unlikely to be able to rejoin it.

‘This could have a significant impact on their future retirement income as DB schemes typically provide much more generous benefits than DC arrangements.

‘In some DB schemes it may be possible for employees to take a contribution holiday without opting out. In that scenario the employee would not build up any benefit for the period when contributions are suspended but may be able to make up the gap at a later date.

Regarding workers made redundant from an employer with a final salary pension scheme, Waites adds: ‘Employees in DB schemes should check with their employer to understand whether any special redundancy provisions apply.

‘Generally for both DB and DC schemes linked to an employer the employee can chose between leaving benefits in the scheme, transferring out or if they are old enough taking early retirement.

‘The administrator of the scheme can explain their options.’

TOP SIPPS FOR DIY PENSION INVESTORS

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