The impact of Covid-19 has affected savings and investments, something that can be a particular concern for those nearing retirement. If your finances have been impacted, you may be considering changing retirement plans, but it’s important to consider your circumstances and the long-term effects, rather than focussing on headline figures.
In recent months, investments have experienced significant volatility, falling sharply in March before making some recovery in the months that followed. While stock markets are more stable than they were, investment values are likely to still be some way below where they were earlier in the year. Whether you’re saving into a Defined Contribution pension or have an investment portfolio earmarked for retirement, it can be a concern.
Research from Aegon suggests the coronavirus pandemic has forced 18% of people to rethink their retirement plans.
On the one hand, some workers are now planning to delay retirement as a result. With pensions possibly worth less than they were a few months ago, it may seem like a prudent step. However, it’s not one that’s always necessary. Those that are self-employed are more likely to put off retirement due to the uncertainty this causes, with 22% of people in this group saying this.
On the flip side, some pension savers are choosing to access their pension earlier than expected. With wages potentially decreased due to furlough or halted altogether, dipping into a pension can seem like an attractive option. With Defined Contribution pensions currently available to access from the age of 55, making withdrawals can provide short-term relief. One in eight (12%) of those aged 55 and over, who before the coronavirus pandemic hadn’t accessed their pension, have now done so. A further 8% have considered this option.
If you’re thinking of changing retirement plans, it’s essential that you understand what it means for you in the short and long term.
Should you access your pension early?
With millions of workers seeing pay reduced due to being furloughed and potentially losing jobs, it’s not surprising that some over 55s are accessing their pension ahead of initial plans.
While this is a step that can ease short-term financial burdens, you need to consider if there will be a long-term impact. In some cases, making early pension withdrawals won’t affect your overall retirement lifestyle and goals. However, in others, it could mean plans you’ve looked forward to are no longer possible.
Before you make an unplanned pension withdrawal, remember to look at what it would mean long term. Even a seemingly small withdrawal can affect retirement plans when you consider these savings will no longer be invested. Keep in mind that you’ve been saving into a pension to support you financially throughout retirement, which could last 30 or 40 years.
In some cases, accessing your pension can make sense, fully understanding the impact means you can have confidence in your choice.
Steven Cameron, Pensions Director at Aegon, said: “For those over age 55, the pension freedoms offer extensive freedom and flexibility in how they access their Defined Contribution pensions, but this can be a double-edged sword. It’s positive that people have the option to use retirement savings intended for later life earlier to reflect their situation. But just because you can access pensions early doesn’t mean you should.
“It’s concerning to see a significant number of individuals accessing pension funds earlier than planned with others thinking about this. While this may alleviate short-term financial pressures, it leaves less of a retirement fund to provide an income throughout what can be decades of retirement.”
Another area to keep in mind before accessing your pension is tax liability. You can take a lump sum of up to 25% from your pension tax-free. After this, you may be liable for Income Tax, which may mean it’s not the most efficient way to access savings.
Should you delay retirement plans?
While you may be financially secure now, you may be worried about what investment volatility means for your retirement long term, leading to plans being delayed.
However, you should keep in mind that volatility is part of investing and over the time you’ve been saving into a pension, you’ve likely achieved significant returns even when the current dip is factored in. At first glance, you may think that a dip in value means your retirement plans need to change to remain sustainable over the long term.
However, that isn’t necessarily the case. When you look at what you need to retire and achieve your goals, it may be possible even if pension values have been affected. Don’t delay retirement plans for financial reasons without first assessing what the recent volatility means for you personally. Headline figures can make the volatility seem more dramatic and, depending on the risk profile of your investments, may be far higher than the dip you’ve experienced.
What’s more important than short-term investment volatility is understanding your priorities, how much you need for retirement and how assets, which may include savings and investments outside of pensions, can help you meet goals.
If you’re thinking of altering retirement plans in light of the Covid-19 pandemic, please get in touch. There may be alternative assets you can use in the short term or you may find you’re in a better position financially than you first thought. By working with us, we can help you balance a short-term shortfall or market volatility with your retirement aspirations.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.