Retirement has evolved significantly in recent years. There are more people considering a “phased retirement” and there are more choices about what to do with their pension funds (rather than just being limited to buying an annuity). Events in the economy have also had an impact. COVID-19 led around 1.5m people to delay their retirement due to concerns about the fall in their pension value. More recently in 2022, rising inflation (now at 10.1%) is also affecting the timing of retirement decisions. In this article, our Carlisle financial planners discuss ways that retirees (and those soon to retire) can keep their pensions on track.
If you are working, keep contributing
It can be tempting to cut back on pension contributions during harder economic times. Right now, vegetable oil costs around £2.58 a litre (it was £1.56 in September 2021) and 500g of pasta was 61p in September – up from 38p a year ago. The rising cost of living is certainly squeezing many people, but lowering (or cancelling) your pension contributions – even just temporarily – could have a detrimental effect on your retirement. Consider, for instance, that contributing £100 per month to a pension over 30 years could result in a pension value of £194,957.49 (assuming a 6% average return). If you skipped a year, however, then you could be worse off by up to £15,000 by the time you retire, if you include the compound interest you might have gained.
There may be circumstances in which you may benefit from lowering your pension contributions (e.g. if you are in danger of exceeding your lifetime allowance). However, speak with a financial adviser before making any big decisions.
Be careful not to raid your pension
According to a recent study, more people are increasing their pension withdrawals to cope with the rising cost of living in 2022. Over half a million people took an average of £7,200 between April and June; the highest rate since 2015 and a 23% increase compared to the same period in 2021. One concern is that some people may be taking from their pension for the first time (whilst they are still working), with the intention of making it up later. The issue here is that this is likely to trigger the Money Purchase Annual Allowance (MPAA) rules, which severely limits how much you can contribute to your pension and claim tax relief going forwards (i.e. £4,000 per year, not up to £40,000). Others may be threatening the long-term sustainability of their pension by going over their “safe withdrawal rate”.
Again, speak with a financial adviser if you are considering accessing your pension for the first time – or if you want to increase your withdrawals. There may be other options available to you.
Avoid impulsive decisions
With lots of bold headlines about falling share prices, rising energy costs and a likely recession, it can be difficult for investors to keep a cool head. You may be tempted to move investments into cash for “safety”. Yet doing so could be hugely damaging. Firstly, you will crystallise losses by selling investments that fell below your initial purchase price. Secondly, cash may shield you from market volatility, but inflation will erode your cash over the long term. For example, with inflation at 11.1%, a 2.55% easy-access savings account would still lead to a 8.55% “real loss” in value, each year, if these figures are sustained. This is not to say that cash cannot be a useful store of short-term value (e.g. for a mortgage deposit). Yet it is generally a poor asset class for building wealth over the years.
Try to remember that your pension is a long-term investment and it is usually unwise to make emotional decisions with a portfolio based on immediate market conditions or volatility. Working with a trusted professional can help you navigate this more calmly and objectively, acting as a “sounding board” for your concerns about your investments.
Review your investment strategy
The primary reasons to buy or sell investments (when working with a financial planner) include “rebalancing” your portfolio when it starts to drift away from your asset allocation (due to varying investment performance), or when your risk tolerance or goals change. It is likely that your portfolio holds many different investments and asset types. So, when you see a headline such as the S&P 500 falling by 20% since the start of 2022, it is unlikely that your pension has taken a similar hit. Remember, also, that markets tend to recover in the long term and so any short-term falls need to be put in perspective. If you think that your portfolio is due a rebalance, or if your goals or risk tolerance have changed, consider speaking with your financial adviser to ensure the best decisions for your portfolio.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.