Pension savers warned about withdrawing cash as inflation soars to 5.4 percent

Financial expert explains how to get the most from your pension

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Pension saving is often considered vital for retirement, as the state pension is increasingly viewed as a safety net. But while saving can be sensible, people should also be considering key pension rules – particularly in the current challenging environment. Yesterday, the Office for National Statistics (ONS) confirmed the Consumer Prices Index level of inflation had soared to 5.4 percent in the 12 months to December.

This represents prices rising by their fastest rate in nearly 30 years. 

With inflation running high, there are impacts for pension savers which need to be considered.

Coupled with this staggering increase, interest rates still remain low, impacting Britons in yet another way.

It is no longer advantageous for individuals to hold all of their money in cash, and therefore other options should be weighed up.

Becky O’Connor, Head of Pensions and Savings at interactive investor, suggested people take action as soon as possible.

She said: “Make sure you don’t have more than you need in cash savings.

“If you don’t need some of the money you have in savings for emergencies or several years down the line, consider a more productive home for that money.

“That is likely to be a pension or an ISA.”

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These options, as highlighted by the expert, are likely to be solid choices due to investment benefits.

Investment can often create better returns for those who choose this path.

However, it does come with risk and individuals could get back less than they originally put in – a key factor to be aware of. 

While investing into a pension is likely to be sensible during a time of high inflation, there are rules to bear in mind.

This is especially the case for individuals who are already accessing their pension cash to help them in later life. 

Ms O’Connor added: “If you’re already drawing an income from your pension, you can continue to pay in.

“This is as long as your contributions don’t exceed the Money Purchase Annual Allowance (MPAA) of £4,000.

“That is the limit for those who have already started taking an income.”

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As the expert highlights, having an understanding of the MPAA is key for those accessing their pot. 

MoneyHelper, the Government-backed service, explains: “If you start to take money from a defined contribution pension pot, the amount that can be contributed to your defined contribution pensions while still getting tax relief on might reduce.”

Most people will be able to contribute £40,000 to their pension each year while receiving tax relief.

However, they could trigger the MPAA if they start to take lump sums from their pot. 

If the MPAA is triggered, the amount reduces to £4,000 per year. 

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