As coronavirus outbreak continues, the economy is looking uncertain, stock markets have fallen and may remain more volatile than usual for a while. It's a challenging time affecting every aspect of our lives, however with proper planning the outlook need not be bleak.
What has coronavirus to do with your retirement planning?
By definition pension is a long-term investment with long-term outlook, hence if you are some time away from considering retirement the likely impact on your pension pot is going be different from someone on the verge of retirement.
Pre-retirement – growth phase
Considering present market volatility, if you are currently contributing to your pension and have quite a few years before your preferred retirement date when you start to draw on your pension, you are likely to ride out any volatility swings caused by Covid-19 between now and the future.
The notion is that markets should recover and it could actually be a good time to consider increasing your pension contributions, if you are able to. The reason for this is that each contribution will buy more units now than it did before the crisis due to present lower fund prices. However if you are close to retirement then volatility is not your friend.
Close to retirement – protection of pension savings and de-risking phase
Many schemes will have been placed into default “life-style” funds, meaning that the closer you get to retirement the more of your funds are placed in to less risky funds e.g. cash, bonds or gilts. In practical terms, whilst your pension savings were not immune to stock market downturn, your risk was cushioned to some degree than if you stayed invested mainly in stocks and shares.
The caveat here is that not all pension schemes offer such life-styling as a matter of course and you should check what funds your pension is invested and speaking to your Independent Financial Adviser here at Royale Thames Wealth, before deciding on your next move.
If on finding that your pension is not in these less risky funds, not all is lost as markets are likely to recover and you have several options. Delaying your retirement, taking a lower income or using your cash reserves for as long as possible.
If you aged 55 or over and considering drawing your pension now than it is imperative that you speak with us and we will be able to explain all your options in detail.
Annuity – interest rate cut to 0.1% means that purchasing a guaranteed income via annuity is a double blow – annuity rates fell and are coupled with fall in fund values. If you are unable to defer your retirement then income drawdown may provide the solution, your savings remain invested and income can be drawn as and when required.
Things to note:
State Pension is not affected by stock market fluctuations.
Defined benefit – the sponsoring employer absorbs any investment risks.
Defined contribution – funds and timescales dependent
SIPP – if adopting a riskier strategy, such as investing mainly in shares then the fund value has fallen sharply. Again, strategy should be reviewed to avoid erosion of capital.
To sum up – pensions are complex, long-term investments whose performance require regular management, review and monitoring – DIY is simply not an option and talking to us will save you money and headache in the long run.
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