Pensions - Articles - Almost half of furloughed workers change retirement plans

As the government’s furlough scheme comes to an end this month, new research from Canada Life reveals that nearly half (46%) of currently furloughed workers have changed their retirement plans.

 According to the survey, almost three in 10 (28%) of workers on furlough plan to retire later, while over one in six (18%) plan to retire earlier than previously planned. On the other hand, over one in three (36%) plan to retire at the same time as previously anticipated, and a further 18% are still undecided.

 Generational divide in retirement plans
 Those aged over-55 appear less worried about the impact of furlough on retirement plans than their younger counterparts. As a result of the pandemic and being on furlough, 53% of 18-34 year olds said their retirement plans had changed, compared to 34% of those over-55s. Over a third (35%) of 18-34 year olds on furlough now plan to retire later than planned, compared to just 10% for the over-55s. Furlough and the pandemic has accelerated retirement plans for one in four (23%) over 55s who plan to retire earlier, compared to 18% of 18-34 year olds.

 Andrew Tully, technical director, Canada Life, commented: “The government’s furlough scheme has been a lifeline for millions across the UK, however we cannot underestimate the number of people who will come out of this scheme in a challenging financial situation. This is demonstrated by the fact that many are changing their retirement plans, with a third of younger people planning to retire later. Interestingly almost one in four over 55s are actually thinking about bringing forward their retirement and leaving work earlier than planned. This could have serious implications for the economy with decades of experience potentially leaving the UK workforce just as we face a jobs and skills shortage.”
 Pension dippers and the ‘sting in the tail’ Money Purchase Annual Allowance / impact on benefits
 Due to the significant impact the pandemic has had on people’s finances, nearly one in ten (9%) of over 55s have accessed their pensions while on furlough to help make ends meet. Many over 55s have flexibly accessed their pensions, with 7% using both their tax-free cash and drawing down additional sums. This triggers the Money Purchase Annual Allowance, which restricts any subsequent tax efficient savings and caps the amount at £4,000 a year, and yet 13% of the over 55s have plans to make additional savings or pension top ups once the furlough scheme ends.

 Canada Life is also warning that flexibly accessing your pension could impact future benefit claims, for example support with council tax or affect universal credit claims.

 Andrew Tully, technical director, Canada Life said: “Using your pension as a bank account might appear as the obvious way to prop up your finances following an economic shock, but you need to be aware of the hidden dangers lurking beneath the rush for cash. If you plan to continue working, and want to top up savings through a pension, then the Money Purchase Annual Allowance will bite in an arbitrary and restrictive way. It serves no real purpose apart from preventing savers rebuilding their pensions post furlough. I’m in favor of simply removing the restrictions, given most people are unaware of the limits, and who may well find themselves on the wrong side of the rules while trying to do the right thing.
 “The other hidden danger is the interaction between pension dipping and the impact on any future benefit claims if you are unable to find work. This is a complex area and it is worth taking expert advice before rushing into any decisions.”
 Canada Life research carried out earlier in 2021 that found that over two-fifths (43%) of over 55s who are working are completely unaware of MPAA restrictions, while a further 40% are uncertain about the details.
 MPAA Triggers
 The MPAA will apply once an individual first flexibly accesses a defined contribution arrangement (known as a trigger event). This basically restricts the level of tax relievable contributions that can be made to a defined contribution scheme to £4,000 each tax year
 These are the most common ways to trigger the MPAA:
 • Taking an income payment from a flexi-access drawdown fund
 • Taking an income from capped drawdown (in excess of the cap)
 • Those who were in a flexible drawdown plan before 6 April 2015
 • Taking an Uncrystallised Funds Pension Lump Sum (UFPLS)
 Individuals may be able to take benefits without triggering the MPAA, for example, access only tax-free cash from drawdown, or take out a guaranteed lifetime annuity.

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