PLANNING for retirement is a lifelong process, and the earlier you start, the better. This is easier said than done, given that the journey to retirement is full of other financial pressures of different shapes and sizes.
A good start is to simply put some money aside, but once you’ve got that under control, you should decide how to invest your money along the way. Much of this depends on what stage of life you’re currently at, and how you see your retirement shaping up.
Much has changed in the world of pensions over the last few years. Gone are the days when you saved as much as possible and bought an annuity on the day you retired. Nowadays there is more freedom over what you can do with your pension money, but with that also comes increased responsibility when making these decisions.
Preparing for retirement
How to prepare for your retirement will depend upon a number of factors, not least your age and life situation.
A huge difference in final pension value can be made if you start saving into a pension early in your career. This can avoid an expensive catch up game if you start later on, when you’ll need to increase contributions to make up for lost ground. Investments that you make for pension provision can, just like all other investments, fall in value as well as rise and whilst we expect that you will gain in the longer term, there are no guarantees and you can end up with a lesser sum than you invested.
Younger savers who need a further incentive should bear in mind that pensions are a tax efficient way to save for your future, as your contributions and any increase in the value of assets within your pot will benefit from tax relief. Nevertheless, you need to bear in mind that pension and tax rules can and do change over time so you need to remain flexible. The effects of these rules will also depend on personal circumstances which can also change.
By the time you’ve reached your 40s, it’s a good time to assess your pension position – you should identify all your separate pension pots, get valuations, look at the risk profile of the investments, and work out where you stand.
Whilst those earlier in their pension journey will likely be taking more risk with their pension assets, the closer you get to retirement, you might consider lowering the risk profile of your investments, leaning towards a capital preservation strategy.
The impact of Covid-19
Covid-19 has dealt a blow to pension fund values which will be most acutely felt by those currently nearing retirement. Although values have recovered from the March lows, there is still a lot of valuation movement and lingering uncertainty. However, those who had already lowered their equity exposure may have cushioned the blow and some may find their fund value has now returned to something near its pre-Covid level.
If you have some years before you’re planning to retire, the advice remains to stay invested and ride out this period of uncertainty, as markets are likely to recover over time, though of course, there are no guarantees on this.
But what if you’re already or soon to be retired?
For those facing imminent retirement, the main question is: how long will the recovery take? While nothing is certain in this unprecedented pandemic, after the last significant market downturn in 2008, the FTSE 100 took two and a half years to return to pre-correction levels.
If continuing to work is not an option, what can you do to optimise the value of your pension? There are options and a professional review is essential. Wherever possible, we would generally recommend using other savings, especially cash deposits or ISA pots if you have them, to fund some early years of retirement, meanwhile leaving the pension to the possibility of recovery with the investment market.
For those already retired, retirement income planning can be complex and some income drawdown plans have also been affected by recent fluctuations. In these cases, be aware that there is the option to pause or reduce income in the short term, to allow investment values the chance to recover more.
If you have been very worried by the recent falls, buying an annuity with part, or all, of your pension pot could provide security, but again, taking professional advice is vital. Those considering this path must bear in mind that while any further losses would be crystallised, the ability to benefit from any future recovery would also be lost.
Claire McCombe is manager of Barclays Wealth & Investments in Belfast
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