07/09/20Does market volatility affect your pension choices?
If you are retiring this year, you may be worried about what the market volatility caused by Covid-19 means for your options.
The good news is that Pension Freedoms, introduced in 2015, means you can choose how and when you access your retirement savings.
Market volatility may have affected the value of your pension but that does not mean your overall plans have to be adjusted. However, it is important that you understand the impact it could have.
The impact will depend on how you intend to access your pension.
1. Taking a lump sum
Once you reach retirement age, it is possible to take your pension through lump-sum withdrawals. You can even choose to withdraw the entire amount, though this is not appropriate for most retirees.
Usually, you can withdraw up to 25% tax-free. If you have intended to take a lump sum out of your pension to take advantage of this, it is worth assessing if your pension value has fallen. Withdrawals that exceed the 25% tax-free lump sum will be taxed as income and could push you into a higher Income Tax bracket. As a result, taking a lump sum may not be the most efficient way to access money.
2. Purchasing an Annuity
An Annuity is a product you buy with your pension savings that delivers a lifetime income. As a result, if the value of your pension has fallen, you may find that the income you can purchase is now lower. However, it is an option that can provide financial security throughout retirement.
The amount paid out will depend on the Annuity rate. For example, a 5% Annuity rate would pay out £5,000 every year for every £100,000 initially paid.
The Annuity rate you are offered varies depending on a range of factors, including your age and health. You can also choose to purchase a joint Annuity, ensuring your partner would continue to receive an income if you passed away first, or one that rises alongside inflation to maintain spending power. These options would typically mean a lower level of income to begin with.
If you would like to use an Annuity to fund retirement, you will need to assess how recent volatility has affected your overall pension value. This means you are able to see what Annuity rates mean in terms of income. Take some time to shop around, different providers will offer varying rates. The good news is that with a guaranteed income, you will not have to worry about market volatility affecting income in retirement.
3. Using Flexi-Access Drawdown
Flexi-Access Drawdown allows you to take a flexible income that suits you, usually, the remainder will stay invested until you make another withdrawal.
This is the option where investment volatility can have the biggest impact. As your savings remain invested, you need to be aware of how your investments have performed. Continuing to take the same level of income during a downturn, as you did previously, will mean you need to sell more units to receive the same amount. This can deplete your pension quicker than expected if you have not considered it beforehand.
As you are responsible for how and when you access your pension, you also need to ensure it lasts throughout your life, which will undoubtedly include some periods of short-term volatility. Therefore, you must consider downturns as part of your retirement plan.
Remaining exposed to the markets is not all negative though. Historically, markets have recovered in the long term. Keeping your pension invested means you have an opportunity to benefit from a recovery as well as long-term gains.
Creating a retirement plan
How and when is the ‘right’ time to access your pension will vary between retirees. It is a decision that should focus on your retirement goals and long-term plans.
Remember, you do not have to access your pension as soon as it becomes available. If you do not need the savings yet, leaving your pension invested can give your investments a chance to recover in the long term and perhaps grow further.
You also do not have to choose one of the above options exclusively. You can mix and match the options to suit you. For instance, you could withdraw your 25% tax-free lump sum at the start of retirement, use a portion to create a base income with an Annuity, and use Flexi-Access Drawdown to access the remainder at different points.
If you would like to discuss your retirement plans, whether this is how current circumstances have affected your initial plans or you are starting from scratch, please get in touch.
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.