Post-pandemic retirement planning

Tips for those approaching retirement

For those of us  approaching retirement it’s a simple rule that we should do everything we can to continue contributing to our pension. That’s because the more we invest, the more we’ll benefit if stock markets start to recover.  According to research from Which? couples need a pot of around £155,000 alongside their state pension to produce the annual income for a comfortable retirement of £26,000 via pension drawdown – or just over £265,000 through a joint-life annuity*.

If you’re 55 or over and have been made redundant or furloughed, you may be tempted to change your retirement plans and look to withdraw your private pension early. However, if this wasn’t part of your long-term plans then you should consider other options first, such as government support like Universal Credit. Considering all of the options available to you could help maintain the longevity of your pension savings.

If you can delay taking your pension this could also help in the future. As markets recover, by delaying when you claim from a defined contribution scheme your funds will stay invested for longer, so you could benefit from a bigger pension pot when you come to retire. Don’t forget, if you defer you could also continue to save as much as £40,000 a year into a pension and earn tax relief under current rules. Another option could be deferring your state pension for extra income. By deferring for five weeks or more, once you do start claiming you’ll receive more than you otherwise would have.

If you want to understand a lot more about preparing for retirement please read our Ultimate Guide to Retirement Planning

Drawing down during a downturn

Drawing money during a market downturn when values have dropped is also more costly than taking the same amount during a strong market. This is because of sequencing risk. When you invest into rising markets, you benefit from compound interest – your capital earns interest, and then the next year it earns interest on both its initial value and the interest reinvested. However, if you start making withdrawals from your pension fund at a time when markets are falling, you lose out as it’s not just the withdrawal that is gone, but so too are the future returns that that money might have generated had it been left invested. If you get off to a poor start then your pension funds will have a harder time recovering and the smaller the fund becomes, the greater the proportion of it is needed to provide the same level of income.

However, there are a number of actions a financial adviser can help you take to mitigate against this.

You also shouldn’t underestimate the importance of inflation. In recent years we’ve enjoyed relatively low rates of inflation. However, as we deal with repaying the costs of the pandemic there are signs that the pressures are building. The speed at which the prices of goods and services rise can be doubly damaging in retirement because it can reduce the value of your capital, as well as the purchasing power of your income. This is why you need a financial adviser, to ensure that you are still investing in the right funds and that your portfolio is well diversified.