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 our financial planning team here at Vesta Wealth Limited in Cumbria, Teesside and across the North of England.
At the time of writing in April 2020, the UK (and wider world) is still engaged in an unprecedented lockdown to try to slow the spread of coronavirus (Covid-19). Stock markets across the world have taken a huge hit, with the FTSE 100 reaching its lowest point since 2016 by the 6th of March, only to see its worst day of performance since 1987 just one week later. This volatility has clearly had a big impact on pensions (which are often invested in stock markets), with some long-term savers seeing their fund fall by 20% or more over the worst period, although many will have seen a partial recovery since then, reducing short term losses.
Given this situation, our financial advisers have, understandably, received calls about how this affects people’s pension plans. Should you change course with your investment strategy in light of Covid-19, and should you delay retirement or buying an annuity?
In this short guide, our financial planning team here at Vesta Wealth will be addressing some of those questions. We hope you find this content useful. To discuss your own financial plan, feel free to get in touch:
t: 01228 210 137
e: [email protected]
Covid-19 and pension transfers
Many people approaching retirement ponder their current scheme and consider moving it to another that is better suited to their needs. Those with final salary pensions (i.e. defined benefit pensions), for instance, do have the option of moving to a defined contribution scheme and drawing benefits after the age of 55. The former type of pension involves receiving a guaranteed, lifetime income from your employer in retirement, often linked to inflation. The latter type involves building up a pot of money for retirement, which you then use to generate an income (e.g. via drawdown or buying an annuity).
Those considering a transfer of final salary pensions worth more than £30,000 are required by law to seek professional financial advice. Transferring, after all, is an irreversible decision and means giving us some very attractive pension benefits, which are difficult – if not impossible – to replicate elsewhere. If you do decide that a transfer is right for you, however, then this essentially involves swapping the lifetime income promised by your employer into an agreed pension pot. Transfer values are notoriously difficult to determine at the best of times; however, at the moment, with the stock markets so volatile in light of Covid-19 it is even trickier, and many scheme trustees are delaying transfers from their schemes.
The 25% lump sum
One crucially important consideration for those approaching retirement is what to do with their 25% tax-free lump sum. This benefit is currently open to over-55s with a defined contribution pension, and taking the full benefit is a big decision requiring careful planning even at the best of times. After all, 25% of a £300,000 pension pot is £75,000, which might be a welcome lump sum (e.g. to help settle a debt) but which also stands to possibly reduce your retirement income. Moreover, if this £300,000 pension pot in early January has now shrunk by, say, 20% in the wake of Covid-19 (i.e. to £240,000), then a 25% withdrawal at this time is likely to reduce your future income even further.
Our financial advisers would, therefore, recommend exercising great caution at this time, regarding your 25% tax-free lump sum. Speak to your adviser to discuss your options, especially if you were planning on making a large withdrawal soon.
Annuities
An annuity is a financial product sold by an insurance company, bought (usually) with funds from your defined contribution pension pot, to provide a stable income in retirement. As with most insurance products, the more capital you are able to commit, the better the deals you are likely able to access. Naturally, with many pension pots lower in value following the Covid-19 outbreak, lots of people might struggle at present to find attractive annuity deals on their own.
Here, again we would recommend seeking professional advice. If you want to retire soon and have your heart set on buying an annuity, then an independent adviser will be able to present the full range of appropriate, realistic options to you.
In some cases, you might have the funds to buy a reasonable income which covers your essential costs in retirement, for instance, whilst an income drawdown approach can be used to cover the more ’luxury’ items. For others, it might be wiser simply to rely on income drawdown until the markets recover; at which point, there could be a range of better deals on offer.
Remember, you can always buy an annuity later, but you cannot return a ’bad one’ which you have bought.
Conclusion & invitation
If you are interested in starting a conversation about reviewing your financial plan, then we’d love to hear from you. Get in touch to arrange a consultation with a member of our financial planning team here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]