The closure of the furlough scheme at the end of last month is likely to lead to some interesting thoughts around retirement planning.
New research from insurer Canada Life has found that almost half of furloughed workers have changed their retirement plans.
46% of workers who are currently on furlough, as the scheme draws to a close, are reassessing their later life plans.
According to the research, 28% of workers on furlough plan to retire later, and 18% say they will retire earlier than previously planned.
However, 36% plan to retire at the same time as initially planned, and a further 18% are still undecided.
The survey shows that older workers are less concerned about the impact of furlough on their plans for retirement.
53% of furloughed 18 to 34-year-olds said their retirement plans have changed, compared to 34% of over-55s.
Over a third of younger workers now plan to keep working longer before retiring, compared to just one in 10 of over-55s.
Andrew Tully, Technical Director, Canada Life, said:
“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.”
One financial consequence of the pandemic is that some older workers have dipped into their pension pots to help make ends meet.
9% of over-55s have flexibly accessed their pensions, with 7% using tax-free cash and taxable income drawdown.
Once you access any taxable income flexibly from your pension pot, your annual allowance for any future pension contributions is lowered for the rest of your life.
The Money Purchase Annual Allowance (MPAA) is £4,000 a year, lower than the standard £40,000 a year Annual Allowance.
This annual allowance reduction for pension contributions is essential to understand because 13% of over-55s plan to make additional pension contributions once the furlough scheme ends.
Andrew Tully continued:
“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.”