How has coronavirus impacted retirement?
In some ways, 2020 feels like living life on pause. Holidays, events, and even visiting loved ones has been put off – for a few months, a year, perhaps more. Savers who had been readying themselves for retirement may also be facing difficult decisions about when they can retire due to volatile market conditions.
How has coronavirus impacted your pension/s?
Retiring soon
If you had planned to retire this year, you might consider deferring retirement, or taking a phased approach and reducing your hours until there is more stability in the market. The value of your pension fund may have fluctuated recently and your circumstances could have changed, affecting any previous assumptions. You can discuss your plans with an independent financial adviser find out whether your retirement plans are on track.
Approaching retirement
Some pensions use a feature called ‘lifestyling’ to mitigate risk as you approach retirement. This means your pension investments are moved into less risky funds such as cash, gilts or bonds as you approach your planned retirement date.
This doesn’t mean your pension won’t be affected which is why it’s important to know how and where your pension is invested. There is some debate about whether this feature is a positive, as retirees could benefit from greater growth potential as they near retirement – which is precisely when the lifestyling features would begin.
You may be thinking about deferring retirement. An adviser shared their story:
“I have a client currently working for her local council who had been planning to take early retirement in May 2020. She has since deferred that, as she couldn’t get out and about to do all the things she wanted to do, including volunteering in the community. The council has kept her on, working from home. Now things are opening up, retirement is very much back on the agenda.”
Already retired
There are several ways to create an income from your pension funds. There are pros and cons to each. Depending on the path you took, your finances will have been affected by varying degrees by Covid-19. Now that you’re retired, many of the decisions you made about how you use your pension funds are irreversible, which is why many of our clients come to us for support at this point on their financial journey.
Annuity – An annuity is designed to provide a guaranteed level of income. (This involves trading your pension pot for a guaranteed income for life, although there are short term annuities available too.)
However, should cost of living increase significantly over time, this may cause things to feel a little ‘tight’. With current Bank of England rate at 0.1%, it would be wise to seek advice before crystallising your pension options.
Flexible withdrawals – If you are flexibly drawing on your funds, remember you can choose how much you withdraw and when. The remainder of your pot is still invested and could benefit from better growth potentials as markets recover. While markets see increased volatility it is not normally wise to withdraw from the market and alternatives should be considered to allow your investments time to grow.
These are not the only options you may have chosen to provide a retirement income. Your financial plans will be unique to you, and it isn’t possible to cover all the alternatives in an article. This is where the support of an independent financial adviser can help, as they provide recommendations tailored to you.
Retirement is a long way off
If you’re currently paying into a workplace pension, and aren’t planning on retiring any time soon, you are in a great position to benefit from pound cost averaging as you save on a regular basis catching the market at different times. You could consider increasing your pension contributions to help them grow when markets ‘bounce back’.
Savings
One outcome of the Covid crisis is that many UK households have been building up their ‘rainy day money’.
“Stronger household balance sheets should mean that consumers are in a good position to start spending again once the lockdowns are lifted,” said Thomas Pugh, UK economist at Capital Economics.
Fiscal measures have been put in place to encourage spending; the Bank of England’s base rate has been cut for the second time in a month from 0.25% to 0.1%, the ‘Eat out to help out’ initiative, and temporary VAT cuts for food, drink, accommodation and attractions. Those that can afford to will be encouraged to enjoy their retirement.
Investments
The government’s monetary and fiscal stimulus has allowed the UK stock market to recover from its March lows. As such, this quarter has been more positive than the previous one, but it has also been more volatile. In their June report, experts at RSMR said:
“As expected the pandemic continues to dominate news flow and will do so for the rest of 2020, but optimism has been seen in global stock markets, as there have been substantial gains from the March lows.”
It is important not to panic in difficult times, and try to view your investments separately from your emotions – something which can be hard to do. While a downturn in performance can be stressful, it is this volatility which also gives investments the ability to grow over time and makes it likely that markets will recover.
Depending on when you are planning to retire, or if you are currently retired, you may need to consider changing your spending habits, or using other assets to provide an income.
Are you considering returning to work?
While some medical professionals returned to work to support the NHS, others may be considering returning to the workplace to strengthen their retirement income. There are other reasons to consider re-entering the workforce – to combat boredom or loneliness, to give you a routine, or to try a new career.
There’s no rule saying you have to retire at a particular age – unless your role demands physical excursion. More and more people are choosing to keep working after their 65th birthday, as shown by this chart from the ONS.
Re-entering the workforce may have knock-on effects on your finances. For example, your earnings may push you into a higher tax bracket. NHS and teachers pensions have their own rules around returning to work.
It’s important to remember that pension savings are designed to be built up over a long time, and to support you for the duration of your retirement.
Depending on where you are on your retirement journey, there will be different options available to you. Your financial adviser will have made their recommendations knowing that the markets fluctuate, and will have factored in the need to be able to weather economic storms. With their support, you can take stock of your spending and saving, and make sure your plans are working as you hoped.
The value of an investment and income from it can go down as well as up, capital is at risk.