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The COVID-19 seems to have had a big impact on pension transfers and withdrawals. In March 2020, studies show that the average withdrawal per person fell by 6% compared to March 2019, and one-off lump sum pension payments also fell by 7%. What seems to be happening is more pensioners are using their Cash ISA or regular savings to fund their monthly expenses during the pandemic, rather than drawing down from their pension.
This can be a really wise approach for some people, as it can help to preserve the long-term value and growth of a pensioner’s stock market investments during turbulent times. However, it’s important to have a sustainable spending strategy and discuss with your financial adviser. After all, such savings will not last indefinitely and it’s important to have an easily-accessible cash emergency fund in case things get worse.
So, how should one approach pension lump sum withdrawals at the present time? To start with a necessary disclaimer, everyone’s financial goals and situation are different. So there cannot be a universal answer. However, there are good financial planning principles which our advisers at Cedar House would like to share with you here. For more information and personalised financial advice, please contact our team via:
020 8366 4400 or enquiries@cedarhfs.co.uk
The “bad timing” of COVID-19
Of course, there is never a “good time” for the world to experience a pandemic. What is difficult, however, is that March and April are typically busy times for pensioners and financial advisers, as the latter help the former maximise their tax allowances before the end of the tax year. Now that the 2020-21 tax year is underway, however, there is a bit more “breathing space” for people to make decisions regarding pension withdrawals.
Naturally, one big question posed by pensioners during the present market volatility is: “Should I take my money out of the markets before things get worse, or stay invested?” Certainly, markets in the UK ad across the world have experienced a beating in the wake of COVID-19 and the subsequent lockdowns. Companies such as BP have experienced huge collapses in earnings in Q1 (i.e. 67%) as demand has shrivelled up. Indeed, across the board equities have declined sharply, leading the U.S. Senate to pass a $2trn stimulus package to try and save the economy. Large-cap stocks fared no better, with indexes such as the S&P 500 down 19.6% by the end of the quarter. All of this is creating understandable anxiety amongst investors and pension savers, who fear further economic contraction and damage to their portfolios.
“Locking-in” losses
Yet here at Cedar House, our financial advisers would greatly urge caution. It’s crucial to grasp this important fact: there are few certainties when it comes to investing, but withdrawing your money during a down market is certain to crystallise your losses. This reality should lead you to pause before panic-selling your equities. Remember, it might feel like your pension has lost tens of thousands of pounds since the COVID-19 outbreak. Yet until you actually sell your equities, you have not, in fact, lost anything.
This is why many financial advisers (including ourselves) right now are stressing that investors “stay in the market” unless your attitude to risk, your investment goals or your overall strategy has changed. If not, then be very careful about jumping ship because the waters are choppy. At the beginning of your savings and investment journey, market falls such as this one should have been anticipated and accounted for. If you feel now that the strategy you chose was incorrect now that times are hard, perhaps you should ask whether you were really honest with yourself from the beginning about your attitude to investment risk.
That might sound harsh, but it’s crucial that financial advisers such as ourselves cut through the noise on social media, mainstream media headlines and other prominent voices to help clients make wise decisions about their pension savings and investments. In short, be careful about making a large pension withdrawal during a down market, even if you are on the cusp of retiring. Unless you have a very good reason (agreed with your financial adviser), this simply risks disproportionately reducing the overall size of your pension pot and eroding your savings.
Running to annuities
Many people are considering buying an annuity right now as a “haven” from the kind of market volatility we’re currently experiencing. After all, this allows you to buy a stable, predictable and guaranteed lifetime income in retirement. Annuities, in general, can be a great option for some people depending on their financial goals and situation.
However, once again it’s important to stress that annuities are typically bought using a lump sum from your pension pot. During a down market such as 2020 Q1 (and possibly Q2), your range of good annuity options is likely to be more limited if your pension pot has fallen in value. This is why it’s crucial to discuss things with your financial adviser before purchasing an annuity during hard economic times. It might be, for instance, that you adopt an “income drawdown” approach in the short term for your retirement income, whilst leveraging some of your cash ISA savings to help cover your living costs. If (when) the markets stabilise in the future, then perhaps an annuity might be a wise decision. Remember, once you have bought an annuity you cannot change your mind after the 30-day cooling period has expired. So it might make sense to wait for a better deal in the future.
Invitation
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 enquiries@cedarhfs.co.uk.