The latest Scottish Widows Retirement Report reveals that 23% of people in their 50s lost their jobs during the pandemic, making it the hardest-hit age group. As a result, many over 50s are worried about not having enough pension income to fund their retirement.
Which groups are in pension poverty?
The pandemic has taken a heavy toll on many people’s finances. But the 50-59 age group has been the hardest hit. In the report by Scottish Widows, 37% of 50-59-year-olds said their financial position has deteriorated because of the pandemic.
By way of contrast, those already well into retirement appear to have been less badly affected. For example, the 75+ age group are the least likely to have suffered a dent in their finances (15%). They are followed by the 70-75 age group (17%) and by 65-69 and 60-64-year-olds (24% and 28% respectively).
Why are 50-59-year-olds worse off?
The high proportion of 50-59-year-olds losing their jobs is down to the nature of the work they do. Of this group, 17% are likely to be self-employed compared to 12% of 25-49-year-olds. Similarly, 24% of this group work part-time compared to 20% of those aged 25-49.
Significantly, both of these types of employment have fared worse than the full-time sector.
Another reason why 50-59-year-olds are worse off is that they simply haven’t benefitted from lower living costs. Just 16% of this age group have seen their day-to-day expenses fall compared to 25% of those in their 20s.
How does this affect pensions?
Scottish Widows found that the over 55s are accessing their pension pots and using savings to cover everyday costs. In just the first three months of 2021, more than 380,000 people took money out of their retirement funds. That’s a 10% increase compared to the same time last year.
With pension pots ransacked, 13% don’t think they’ll ever be able to give up work.
But the pandemic hasn’t just dented pension funds. Scottish Widows warn that anyone accessing retirement savings could also face an unexpected tax bill.
Currently, you can put up to £40,000 into your pension every year and get tax relief on this amount (20% or 40% depending on whether you’re a basic or higher rate taxpayer).
However, if you access those funds early and then continue to add more into your pension at a later date, the amount you can claim tax relief on is slashed to just £4,000 per year. In other words, anything more than £4,000 will be taxed. This rule is set under the terms of the Money Purchase Annual Allowance (MPAA).
Here’s an example of what could happen if you take out pension savings but then continue to add to your pot:
- If you save £5,000, you’ll get tax relief on the first £4,000 only
- You’ll need to pay tax on anything thereafter (£1,000)
- Basic rate taxpayers will pay £200 (20% of £1,000)
- Higher rate taxpayers will pay £400 (40% of £1,000)
What’s being done about pension poverty?
Scottish Widows has called for the government to step in. This is not just to address the MPAA rule that lowers tax relief, but also to boost help for the self-employed who have fallen through the cracks.
Peter Glancy, Head of Policy at Scottish Widows, said: “Retirement may start to seem like an impossible dream for a group of people who have already spent 30 plus years in the workforce. And if we’re to ensure a whole generation is not condemned to work until they drop, urgent government action is needed.
“We’re calling for MPAA rules to be temporarily suspended for older workers to help them get their savings back on track during these extraordinary times without being penalised.”
Distressingly, a separate study by the Independent Age charity found that more than two million pensioners were already living in poverty. Of that number, 1.1 million were experiencing severe poverty. So it seems that while pension poverty is being highlighted, action is yet to be taken.
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