Growing numbers of pension savers have withdrawn money from their pension pots during the pandemic.
Figures from HMRC reveal 347,000 people withdrew from their pensions during July, August and September 2020 — up 6% compared to the same quarter last year.
The uptick runs contrary to seasonal patterns, according to HMRC, and will likely raise concerns that increasing numbers of borrowers may see shortfalls in their pension when they need it later in life.
David Forsdyke, our Later Life Finance expert, suggests this increase in pension withdrawals is likely to be connected to the pandemic, as a growing number of people look to replace lost income, to support their family or shore up their business.
“In some circumstances, lifetime mortgages can provide welcome funds to plug temporary financial pressures, or longer-term shortfalls in income. They allow older homeowners to unlock equity they have built up in their home over many years, while continuing to own and live in it. The cost of these mortgages has dropped dramatically in recent years, and the flexibility they now offer is making them very attractive.”
David outlines three options available to homeowners, with a lifetime mortgage:
1. You can set up what’s known as a “drawdown facility”
Sometimes this is known as a reserve facility. This is an amount pre-agreed when the lifetime mortgage is first taken out and allows you to withdraw (draw down) these funds when you want them. This can be on a regular or ad hoc basis, and the advantage is that you won’t pay any interest until you have withdrawn the money. This sounds ideal if you need to top up your income, or needs funds at different times, and it gives you control over how much and how often you withdraw. Borrowers must be careful not to withdraw the whole facility too soon though, as you may find it very difficult to access additional funds in the future.
2. You can set up an “income” lifetime mortgage
There are products that pay a fixed amount of ‘income’ each month. With this option, you would select a fixed amount to be paid to you each month and also a fixed term over which you will receive these payments. The only downside is that the payments don’t take account of inflation and can’t be extended if you find you need the additional money for longer.
It’s important to remember that the regular payments are not actually income; they are borrowing. They look and feel like income, but do not need to be included as income on your tax return each year.
3. You can borrow a lump sum
For some people, a simple injection of funds could help them or their business survive the lockdown. Interest rates for lifetime mortgages are at their lowest ever, and borrowing now could be a wise decision. However, such borrowing is a long-term commitment, and care must be taken not to cause yourself a problem in the future. Make sure you take professional advice.
Tax efficiency
Borrowing against your property rather than withdrawing from pensions can have tax advantages. Because borrowing is not regarded as taxable income, it means you don’t risk stepping into a higher income tax bracket by using your property wealth. You do need to be careful if you are claiming means-tested benefits though, and we recommend you speak with an adviser about this to check there are no adverse effects. For some homeowners there are also potential Inheritance Tax advantages in creating debt against property.
If you would like to know about lifetime mortgages or discuss your financial plans for retirement, why not watch our recent webinar on-demand here, or get in touch with the team.