Given that for most people, their pension will be the largest investment they ever make, the turbulence in the markets caused by the Covid-19 pandemic will have impacted on most people’s retirement plans – but especially those due to retire in the coming few months.
Prior to Covid, the markets were seeing continued buoyant times, bouncing back after a dip in March 2019, following eleven more or less constant years of growth. For those retiring in late 2020 and early 2021, the prospects looked good.
However, the completely unforeseen shock to the markets caused by the virus has turned that on its head. So what should those now approaching retirement do now?
Traditionally taking your pension meant buying an annuity, which provided you with a guaranteed income for life. The level of income you could expect to receive was determined by the state of the market at the moment you bought it (and the value of your ‘pension pot’), and prevailing interest rates. Clearly to do that now would be a double whammy; buying an annuity based on historically low interest rates, when the value your pension pot is likely to have been impacted by the Covid crash, is unlikely to give good returns.
Thankfully, following updated pension legislation which took effect in 2015, which allowed greater access to pensions, there are now other options. Purchasing an annuity is now optional, but if you have a Flexi-Access Drawdown pension, you can simply draw an income directly from this. Those who need to draw from their pension pots can draw the funds the need, leaving the rest invested with the hope of a market bounce when (if?) a vaccine becomes available.
An even better choice for those who can is to use existing non-pension savings for income in the short-term, as these are not likely to be earning much interest anyway. That way, you can leave your tax-efficient pension intact and invested while you wait for the markets to recover. This also has the advantage of reducing your estate for any potential inheritance tax liability, as savings are counted as part of the estate while pensions are generally not.
Most people view their pensions as a source of retirement income and their savings as something for a rainy day. Well, if the Covid pandemic doesn’t count as a rainy day, you will probably never need an umbrella!
The third option is to review whether now is the right time to retire at all. Whilst most of us have a firm date to stop work in our minds, there is nothing to say you must do it at a specific age, and events such as those which have knocked us all sideways this year demand a certain flexibility. Staying working for another six months means half a year more salary, a shorter period that your pension will eventually have to fund, and it gives your pension pot a chance to recover from the short-term Covid shock.
Whatever you choose, it is more important than ever to review your pension provision before making any decision. Given the current volatility, you may want to reconsider your attitude to risk. If you took your pension out before 2015, you may need to convert it to a Flexible Access Drawdown Pension in order to be able to draw down funds flexibly – this is not a complex process, but is best achieved with the help of a professional adviser.