My inherited pension pot is down a fifth in value – what should I do?

I would like to ask you some serious questions about my pension decisions. My husband passed away in summer 2019.

He had a lump sum pension at a big pension company. Recently, due to the virus outbreak, the value has gone down a lot from £148,400 to £121,000 in current market value.

I am under pressure to make a decision on whether to take it out now with a loss or to wait for when the market gets better, and I don’t know when the virus will be controlled and stopped.

The deadline for me to take a decision on the full lump sum without paying tax is due in summer 2021. Anything after that date, I have to pay up to 40 per cent tax on the lump sum if I take it out.

Please, I am begging for your advice on making this decision, while I am looking after my five-year-old twins on my own after their dad passed away last year. I am really helpless at the moment.

I would really appreciate it if you could offer any help on my situations. Many thanks in advance. From a full-time mum.

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Steve Webb replies: Managing on your own with young twins must be hard enough at the best of times, and I’m sure it is especially tough at the moment.

Hopefully I can put your mind at rest regarding your financial position.

As you say, under current tax rules if someone dies under the age of 75 then the person who inherits their pension pot can do so tax free.

But this only applies if the money is taken out within two years, otherwise the pension company will deduct income tax before they pay out.

Given that you could pay tax of up to 40 per cent on any withdrawal, there is a strong case for taking the money out before the two year deadline.

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There might be a case for taking the money out more quickly if you are desperately short of money to live on, but ideally you would try to avoid using up the pot if possible.

However, because it is more than a year before the deadline is reached, there is no urgent need to make a decision.

Indeed, if you are feeling stressed and have a lot of other things on your mind, the best thing might well be not to make a decision for now.

Once things are a bit more back to normal, you could consider talking to a financial adviser who would probably have an initial conversation for free.

Assuming that they agree that it makes sense to take the money out before the two year deadline, they could suggest where best to invest the money for the future, perhaps mixing some money for your short-term needs with investing for your longer-term future.

In terms of the markets, there is no doubt that the recent slump has been frightening for many investors, and we have had a lot of questions in the last week or two on this issue.

The short answer is that it is incredibly difficult to ‘time’ the markets so that you invest just before they rise and pull your money out just before they fall.

Assuming that your late husband was investing in his pension over a period of many years, a significant chunk of the money in the pot today will be the result of years of investment growth and it is easy to forget this at a time when markets are falling.

From the age of your children I’m guessing that you are relatively young and can invest for the long-term.

In general, it would be good advice not to over-react to short-term market fluctuations, including by ‘locking in’ your losses by selling straight after a market fall, especially if you don’t urgently need to access the money.