Has COVID 19 impacted my planned retirement age?
COVID-19 has undoubtedly had a major impact on Worldwide investment markets over the last 7 months.
According to research by insurer Royal London (May 2018), you will need a pension pot of £260,000 if you want a comfortable retirement (in addition to a full State Pension of £9,110.40pa) view research.
The average pension fund fell by 15.2% in the first quarter of this year (2020) view source.
Using the example above a £260,000 pension would have dropped by £39,520 pretty terrifying figures!
But it’s not all bad news! Markets do seem to be shaking off the virus, the FTSE 100 has grown just over 17% from it’s lowest point in March, to October 2020.
So whilst any major drop in fund performance or value is concerning, it’s important not to panic!
Question
Should I increase my pension withdrawals (or take out a lump-sum) and lower my investment risk in case markets fall again?
Crystallising more of your pension than you originally planned for, or doing so sooner than planned will only accentuate the financial impact on your retirement planning, it could even force a reduction in future withdrawals or a need to push back your retirement age to ensure the sustainability of your pot. In reality, both measures may be required!
Although reducing the risk of your pension portfolio will provide additional protection against future market fluctuation, it also effectively crystallises losses already suffered by reducing potential future growth/recovery. As most people close in on retirement, the level of investment risk taken tends to reduce due to a shift in emphasis from “I want this to grow” to “I want to protect what I have” and this is often managed in several ways; the type of funds invested in i.e. funds that have a lifestyling feature, rebalancing at an annual review with an adviser, or rebalancing personally to reflect the desired level of investment risk. These types of organic or pre-planned risk management should remain uninterrupted by market conditions, however, sudden or drastic measures taken in response to market movements may negatively impact and complicate future planning.
What can you do?
Thankfully, you do have some options. Here are some considerations to bear in mind;
Delay taking your tax-free pension commencement lump sum (25%)
This will then remain invested with the rest of your pension and has the opportunity for further growth
Stagger your tax-free withdrawals - You don’t have to take your 25% all at once, why not take it as and when you need it?
If you don’t have any immediate plans for the money you’ll need to find another home for it (easy access savings accounts are currently offering between 0.50% and 1% interest per year)
Referring back to the example of a £260,000 pension value above, this would mean leaving £65,000 (25%) invested in the pension
Assuming a Low-Medium annual rate of return of 3.5%
Delaying the withdrawal of your 25% for 3 years could result in an increase in fund value of £288,266, increasing your available 25% by £7,066
Draw an income from your other savings first
If you have savings in ISA’s for example, the income you draw from these is tax-free, so you could use these types of savings to supplement your retirement income.
Continue to fund your pension
By continuing to pay into your pension not only with you benefit from income tax relief on your contributions but you could also benefit from pound-cost-averaging when markets recover
Be aware - if you are already in receipt of a flexible pension income, you may have triggered the Money Purchase Annual Allowance (MPAA) and will therefore be limited to maximum contributions of £4,000 per year
Question
Does the State Pension have an impact?
As previously mentioned, for most people (Those with a long pre 6/4/16 NI record may have a higher figure) the new State Pension will pay a maximum of £9,110.40pa which equates to £175.20 per week. Each person is different, some will rely heavily on this money to fund their retirement.
Unfortunately, many of us will have to wait a bit longer before we can start claiming this as the state pension retirement age has increased in recent times and now stands at age 66, where previously this was 60 for women and 65 for men. The reason behind this increase lies in the fact that many of us are living much healthier lives and are subsequently living longer. Life expectancy plays an important role when it comes to your retirement planning and we would suggest you check what your life expectancy age is today.
Use this life expectancy calculator from the Office of National Statistics to find out yours - go to calculator
Another thing to bear in mind is that not everybody is eligible for the State Pension, as this is usually only available to those who have paid at least 10 years’ worth of national insurance contributions. (Those with a pre 6/4/16 NI record may achieve a state pension with less).
In Summary
COVID 19 has had a big impact on all investments, including pension funds and even though markets are showing signs of recovery, there is still much uncertainty in today’s economy. This will almost certainly make people think twice about their planned retirement age, but the key message we want you to take away is not to panic.
There are many options available and for some, pushing back the age at which you plan to take your pension might be right but it is important to speak to a professional adviser who can help you understand your circumstances.
If you are unsure of your next steps or how your personal situation has been affected, Informed Pensions are here to help clear the mist and provide clarity on your retirement planning. If you would like to speak to someone about the impact of COVID on your pensions, please get in touch by booking your free initial consultation.
Please note: The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.