This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.
Anyone approaching or in retirement right now is bound to have many questions, as we enter April 2020. The stock market has experienced great volatility and decline in the first quarter, leading many to feel concerned about their pension investments. In the final week of February, for instance, UK pension funds lost 5-6% of their value as stock markets reacted to the new of COVID-19. If you had a pension worth £250,000 at this time, then in the last 5 days of February it likely might have dropped by £13,000. Those with a pot of £1m could have seen the value of their pot erode by £50,000+.
In early April, things have hardly gotten better for pension savers since that time. The FTSE 100 (which many pension funds invest in) has seen its biggest fall since 1987; down by about 20% on the 31st of March 2020. Many people have approached financial advisers such as ours here at Cedar House, asking questions such as:
- “Should I delay my retirement plans until all of this blows over?”
- “How do I stop my pension investments from falling?”
- “I was planning to transfer my pension. Should I do that now or wait?”
These are all important questions, and we will touch upon some of them here. However, in this article, we focus our thoughts on the latter question. For more information and personalised financial advice, please contact our team via:
020 8366 4400 or email@example.com
Final salary pension transfers
Most people who are interested in a pension transfer hold a defined benefit (or “final salary”) pension, who have the option to transfer out from age 55 (i.e. into a defined contribution pension). The former type of pension is widely regarded as “gold plated” by pension specialists since their benefits are difficult to replicate elsewhere. In particular, they offer a guaranteed lifetime retirement income from your employer, typically linked to inflation. As a result, most people are unlikely to benefit from a pension transfer except in specific circumstances, and anyone with a final salary pension worth over £30,000 is required to seek professional financial advice before any transfer.
Whilst many people will likely be better off retaining their final salary benefits, some will be attracted to the advantages of transferring. For instance, you cannot pass a final salary pension to children/grandchildren as an inheritance one day, which you can do with a defined contribution pension. However, the present market environment in March-April 2020 has raised even more questions about the wisdom of transferring out of a final salary scheme at this time.
Former pensions minister Baroness Altmann, for instance, has recently called for a six-month ban on final salary pension transfers in light of the COVID-19 outbreak. This is because pension fund trustees/administrators are struggling to estimate the underlying value of their funds, given the present market turmoil. This restriction, if implemented, could have the effect of allowing time for a clearer picture of the market to emerge, as well as help to prevent pension scams as people self-isolate at home.
These proposals have not yet been brought into force, and are controversial. Many argue that the option to transfer your pension is a statutory right, and there could still be legitimate reasons to do so even in the present economic situation. However, you should always seek professional financial advice before making any decisions about a transfer.
To delay, or not to delay?
If you are aged 55 or over and have been thinking about retiring soon, then the present situation is likely to raise questions for you. For instance, what should you do about your 25% lump sum? After all, if the overall value of your pension pot has declined in light of COVID-19, then 25% of your total pot will represent a smaller sum compared to what it likely would have been in early January (before the outbreak hit the markets). On this front, again, it’s crucial to seek financial advice about the best options for your financial goals and unique situation.
Those considering an annuity will also be facing some difficult choices right now. Since this involves taking some/all of your pension pot to buy a lifetime retirement income product, you might be facing fewer attractive annuity options given your shrunken portfolio. Here, the best course will depend heavily on your individual needs, objectives and circumstances.
Some might be in the fortunate position of still having the funds they need to buy an annuity which covers their essential retirement expenses. Income drawdown could then be used to cover more luxury expenditure, and the withdrawals could increase in future months/years as the market picks back up. Others, however, might be better served by delaying their annuity purchase plans for the time being, following advice from their financial adviser. This does not necessarily mean delaying retirement and working longer (although this might be the best option for some). Alternatively, it could be that your financial adviser recommends following an income drawdown approach for the time being, and delaying an annuity purchase for later.
There are many pressing, complex questions facing pensioners in 2020. The UK government’s financial support announcements in March, moreover, largely focused on helping the younger, working population rather than pensioners and those approaching retirement. As a result, it is a good idea to consider professional financial advice, to ensure you have the best guidance and information possible to make informed decisions at this difficult time.
If you would like to discuss your financial plan or retirement strategy with a member of our team, then get in touch today to arrange a free consultation:
020 8366 4400 or firstname.lastname@example.org.