This is the first in a series looking at how Covid-19 could affect your retirement plans, for those about to retire, those who have just retired and those with 10 years and 20 years still to go. It will be published at 6am on Wednesdays.
The pandemic has derailed many aspects of our lives, whatever our age. It has shown that even the most carefully laid plans can get swept away and retirement dreams have been no exception.
Those who have fully or partly invested their pension in the stock market will no doubt have been worried about the ongoing turbulence and what it means for their hard-earned savings.
Steven Cameron of Aegon, a pension provider, said the issue would be particularly pertinent for those who were about to retire, with a pension that is primarily invested in stocks and shares.
The good news is that most people saving into a workplace pension will be in a default fund, which typically reduces the exposure to stocks as a member approaches their planned retirement age.
The first priority is to check the size of your retirement funds, other savings and sources of income to figure out if you are still on track with your plans. You may find that your pot has bounced back since the stock market lows of March.
Many savers have been forced to reassess their future plans and retirement goals this year, with one in eight of those aged 45 or over saying they have had to make changes, according to a study by Moneyfarm, an investment service.
To see whether you are on track, you need to have a clear idea of how much money you will need to live on to cover the essentials plus enough for the quality of life you hope to have. Only then can you make financial decisions. Mr Cameron said.
“If you are, say, three years away from retirement, it’s very difficult to know what will happen to the stock market between now and then," he said. "If you move out of stocks and shares into safer investments such as gilts, you may limit future losses but also lose the possibility of future gains if stock markets recover.”
If you were planning to buy an annuity, a form of guaranteed retirement income, be aware that you will face a new challenge as the cut in Bank Rate to 0.1pc means annuity rates are also at an all-time low. You may therefore get less for your money than you would have before the pandemic.
If you are over 55 and not quite at your planned retirement age, you may be considering dipping into your pension if you have had financial troubles this year. But just because you can access your pension savings, it does not necessarily mean you should.
There are four key questions to ask yourself before tapping into your pot, according to Mr Cameron.
The first is whether it is better to use other savings before resorting to your pension. “Your defined contribution pension is likely to be invested at least partly in stocks and shares, which have recently seen a significant fall in value. Taking money out in the current market conditions means the money you withdraw doesn’t have the chance to recover its value if stock markets then recover,” he said.
Second, calculate how much you actually need right now, so you can avoid taking out more than is necessary.
Third, and importantly, have you checked how this will affect the income tax you’ll pay? You can take 25pc of your pot tax free but the rest will be taxed as income when it’s withdrawn. If you take out a large amount in one tax year it could push you into a higher tax bracket, meaning you would have to pay more tax than if you had taken smaller amounts out over a longer period of time.
Finally, will you want to pay into a pension in future? Many will find themselves out of a job as a result of the pandemic and hopefully this will be short term, but if you decide to take money over and above tax-free cash, you could be limited in how much you and a future employer are allowed to pay in in future. The “money purchase annual allowance” means that contributions from you and your employer cannot exceed £4,000 a year without facing heavy penalties.
The pandemic has forced more workers over the age of 65 into retirement, according to Stephen Lowe, of Just Group, a retirement planning specialist.
Figures released by the Office for National Statistics showed that the number of employed women over 65 peaked at the start of the year at 631,000 but dropped to 540,000 by May. This means that there were 91,000 fewer of these women in jobs. possibly as a result of the economic devastation caused by lockdown. The number of men over 65 in employment fell by 51,000 during the same period.
Mr Lowe said: “These latest figures suggest that one effect of the pandemic has been to knock back progress, with the number of older women staying in the workforce falling sharply.”
This could be because women are three times more likely than men to be part-time workers, which have often been the first casualties in redundancies.
Those plunged into unemployment may start to consider their future retirement. However, figures from the Money and Pensions Service, an independent organisation, show that three million over-50s will leave planning their retirement finances to the final two years before they stop work.
Over a third of all over-50s leave planning for retirement late or fail to plan at all, it said.
Carolyn Jones of Maps urged people not to delay or skip planning particularly as many will have had their finances impacted by the pandemic.
She said: “Getting help and talking through your options now could be the difference between having a comfortable retirement or having to work for longer or adjust to living on a lower income.”
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