Opinion  

Replenishing pension saving pots post-Covid

Lisa Best

Lisa Best

The advent of Covid-19 caused a well-documented and dramatic drop in pension values.

The Times reported in April that savers in more than 350 pension funds had seen the value of their investments fall by 25 per cent since the start of the year, and some had lost half, due to market drops as a result of the pandemic.

While pensions are generally intended to be long-term investments and there have been significant market rebounds since then, there are still persistent worries about the global economy.

And according to Scottish Widows research, over three million people have reduced or stopped completely their pension payments as a result of the crisis, leaving a hole in pension savings for 10 per cent of UK adults. 

With the financial pressures brought by lockdown, furlough and expected job losses, it’s not surprising that the first quarter of 2020 saw the value of withdrawals at the highest recorded for any year since pension freedoms began.

Fixing the damage

While the figures have since stabilised, for many, the damage has been done.

The problem is that this has a knock-on effect when it comes to replenishing pension pots as, once you start to access your pot, the Money Purchase Annual Allowance (MPAA) comes into play.

This is designed to prevent people from recycling their pensions and the tax reliefs they provide by withdrawing cash from their pots and then claiming tax breaks on new contributions.

The MPAA reduces the amount that can be paid into a pension annually from a maximum of £40,000 to just £4,000, a particular issue for the more wealthy. What’s more, it also means the loss of the ability to carry forward unused pensions allowances from up to three previous tax years.

This may leave excess funds looking for growth in a home that, like a pension, doesn’t ordinarily attract  inheritance tax (IHT). One option could be putting those funds into an Isa, assuming the pension holder does not already make use of the £20,000 annual allowance.    

Another could be investing in Business Relief-qualifying shares which, after a two year minimum holding period, have their IHT liability reduced to zero.

Understanding the risk

And for those with a greater risk appetitie, Enterprise Investment Scheme-qualifying shares generally also qualify for Business Relief, giving a combination of tax free capital gains and income, loss relief to protect a substantial portion of investment and 100 per cent IHT relief. 

Unquoted Business Relief-qualifying investments also hold advantages during times of uncertainty as they can mitigate volatility issues as they are not subject to the same systemic risk as all listed investments: Private trading companies are generally valued solely on their fundamentals, rather than short-term sentiment.