Don’t panic: those retirement plans are still very much doable

Christopher Egmore
Chris Egmore

Those approaching retirement and worried about market volatility affecting their pension pots don’t need to panic, says Chris Egmore of Lovewell Blake Financial Planning.

Chris Egmore

A pension is usually a very long-term investment, which means that volatility in the markets, such as we have seen in the past few months, tends to balance itself out over time. 

But what if you are now approaching retirement?  Watching your pension pot take a hit at the very moment when you have little time to experience any ‘bounce’ can be dispiriting.  This is particularly true when gilts – traditionally regarded as a safe haven, and where many fund managers shift the bulk of a pension in the last few years before retirement – have proven themselves in recent weeks to be just as susceptible to the market as many other types of investment.

So should those hoping to retire in the coming years be panicking?  The answer is no: a combination of the game-changing 2015 Pension Freedom regulations and soaring annuity rates mean that recent events shouldn’t put your retirement plans in jeopardy – although you may need to rethink how you take your pension when the time comes.

There is no getting away from the hit that many pension pots have taken during the political and economic turmoil of the last few months.  Many will have seen a reduction of anything between 5% and 20%, and if you are close to retirement, it is far from certain that you will be able to make that back up before you finish work and need to take a pension.

The good news is that that Pension Freedom legislation gives you plenty of flexibility as to what you do when you stop working.  You don’t have to take all of your money out of your pension pot at the point you retire, and indeed you may choose to leave the vast majority of your pot invested, drawing down the income you need and giving your fund the chance to take advantage of any mid-term bounce in the market.

Some investors would rather have certainty than leave their future income to the vicissitudes of the market.  The good news for these people is that rising interest rates are being accompanied by significant increases in annuity rates. 

At the end of 2021 you would expect to achieve an annuity rate of around 4.3% for a level term annuity, and just 2.7% for an annuity which escalated at 3% a year.  Right now those figures are 6.5% and 4.3% respectively – representing a more than 50% increase in the income that the same pension pot will buy today compared with less than a year ago.

So even if your pot has taken a 20% hit in value, it will still buy a higher level of income in retirement now than it would have done at the end of last year.

Of course, those same Pension Freedom regulations give you the option of annuitising just a part of your pension, and leaving the rest invested, allowing you to lock into an element of certainty while still giving yourself a chance of seeing your pot grow.

Of course, the return of high levels of inflation should focus every retiring person’s mind on the future value of their pension.  In times of negligible inflation, a level-term annuity might be sufficient, especially as in most cases it will be enhanced by a state pension a few years down the line.  But with double-digit price rises, ensuring your will have enough to live on in future years is an important consideration.

As ever, taking professional advice , whether you are at the point of retirement or are a few years away – is vital.  But there is certainly no need to panic, and despite the economic clouds which are looming, for those in the last few years of their working lives, it is certainly not all doom and gloom.  With careful planning, a comfortable and fulfilling retirement is still very much possible.

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