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The pandemic in 2020 has brought many unforeseen consequences to retirement planning. For some people, their desire to retire early has been thrown into question due to the decline in the value of their pension pot. In April, amidst the UK’s first lockdown, pension funds in the UK fell by average 15% in the first quarter (Q1) – wiping out much of the growth achieved in 2019. Yet COVID-19 has also led some people to consider dipping into their pension pot due to lost work, which they have struggled to replace with other paid income within the economic circumstances.
In this article, our financial planning team here at Cedar House takes a closer look at how the pandemic has affected retirement planning in 2020 – also offering some ideas to consider for your own case. We hope you find this content helpful, and invite you to contact our team here at Cedar House for more information or to access personalised financial advice:
020 8366 4400 or firstname.lastname@example.org
Unemployment and early retirement
Your 50s and 60s are arguably a delicate time for your finances. On the one hand, finding a new job with a similar wage (e.g. due to redundancy) can be hard even in “good” times, especially due to the limited time to retrain and climb the job ladder in a new sector. With the pressure of COVID-19 added on top, the IFS (Institute for Fiscal Studies) claims that this has forced many to endure shorter hours and wage slumps. Yet given the rise in unemployment in 2020 and the resulting increase in job competition, many over-50s feel they have little choice but to endure and hope that they can continue working when the furlough scheme expires in 2021.
On the other hand, many older workers also now feel they have little choice to retire early – even if this may result in a precarious or lower-quality retirement. In August, for instance, one study suggested that as many as 100,000 women over-50 had felt forced to make this choice. Those in this position have also been caught in a difficult situation with a reduced pension pot, which is often invested in stock markets which have fallen dramatically in 2020.
We do not want to beat around the bush. COVID-19 has left many people facing difficult choices about their finances – particularly those looking to retire within the next 10 years. Here at Cedar House, our financial planners want to help you assess your options and make decisions which best achieve your goals.
Ideas for those considering retirement amidst COVID-19
Before we proceed with some ideas, please consider seeking independent financial advice to discern which ones may be more appropriate to your own case. With that said:
- Consider giving your equities time to recover. It’s no secret that most pensions have suffered due to falling stock markets in 2020. Yet there are already encouraging signs that markets are starting to recover. The victory of Democrat Joe Biden in the US presidential race as well as Pfizer’s recent announcement of a possible vaccine for COVID-19 have been significant boosts.
- Reassess the role of your state pension. In 2020-21 the full new state pension grants you £9,110.40 per year. Yet you must reach your state pension age (66 in 2020) and have 35 qualifying years of national insurance contributions on your record to receive this. As such, those considering early retirement should think carefully about how they will use their state pension within a viable long-term strategy. Bear in mind that if you retire at 55, for instance, then you will not be able to access it for potentially another 12 years. To make up the difference, you may be forced to rely on ISAs or your pensions – which may erode the latter’s value disproportionately over time.
- Think about your living situation. For those who originally planned to downsize in the distant future for their retirement, one option could be to bring this decision forwards. House prices are currently still rising, and buyers have incentive due to the Stamp Duty Holiday (set to expire in March 2021). The proceeds from a sale could go a long way to help boost a pension pot or purchase an annuity.
- Be careful about shifting investment strategy. As mentioned, many people have seen their pension pot fall in value in 2020. Yet one of the biggest mistakes to make in such a situation is to abandon the markets, or to sell your equity investments for something else (e.g. bonds) when they are at their low point. This only serves to crystallise your losses, and it does little to change what happened. One sad story in The Telegraph tells of a man who has lost over £200,000 from his pension since March, and who has reacted by shifting investments around quite considerably – locking in the losses. Think carefully before acting impulsively on your pension investments, and consider getting professional financial advice to survey the best decisions to take in the short and medium term.
Conclusion & invitation
Interested in discussing your pension or wider financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team via a free, no-commitment consultation:
020 8366 4400 or email@example.com.