Beena Nadeem explores the world of retirement planning and how Covid has made it more complicated for many.
The pandemic is kicking retirement planning for the over 50’s out of shape as thousands of people now face working past their planned retirement age or are tapping into pension savings early.
Research by think tank the Institute for Fiscal Studies shows that 13% of workers have delayed retirement and 9% have taken early retirement as a result of the Covid-19 pandemic. Meanwhile, Interactive Investor’s survey of 12,000 adults found that hardship among older people is forcing one in five of those coming up to retirement to now expect to carry on working.
If they do become unemployed because of Covid, PensionBee found that more than a fifth of 55 to 70 year olds are likely to make a pension withdrawal, with only 16% saying they would reduce the withdrawal amount due to Covid. Overall, though, it said a third of its clients remained in a financial fog about decision-making around their pensions.
Chief executive Romi Savova says that the opportunity to withdraw 25% of a pension tax free as people reach their 55th birthday is proving hard to resist, leaving many to access pensions earlier than necessary. This, she says, “surrenders valuable guarantees and reduces long-term returns. We found that one in five savers would withdraw simply ‘for control’, which often means moving it to a savings account earning little interest or other investments”.
Women have missed out more than men during the lockdown, mainly because they often work in the service industries and these have suffered the most, says Jasmine Birtles, director of Money Magpie.
“Add this to the lack of pensions savings earlier on in their lives and they do have a tougher time. I think that women need to be encouraged to get into investing at any age. They also need more information on how to access their partner’s and ex-partner’s pension,” says Birtles.
Financial consultant Tracy Simpson, a chartered financial planner specialising in women’s security, says concerns over the gender pension gap widening further because of the impacts of Covid means women may face even more uncertainty than ever around their retirement planning.
“The fact that many women are employed in the hospitality and beauty sectors along with the impact of nearly a year of reduced furlough income may mean many have seen their pension contributions reduced or, worse still, stopped,” she says.
For women, especially those over 50, who have paid little attention to their pension planning, this can be overwhelming.
“Many women over 50 facing redundancy and prospects of long-term unemployment due to limited job vacancies in most sectors who may have been hoping for an early retirement may have to reconsider their options,” she adds.
Simpson suggests getting a state pension forecast to see what benefits you will get from the state and addressing any shortfalls. Also, it is important to trace lost pensions – an estimated £19.5bn of pensions are in ‘gone away’ pots, with an average of £13,000 per pot, she says.
Simpson also advises getting up-to-date valuations on any existing and current plans so it is clear what they will provide. As well as this, anyone over 50 is entitled to a free ‘Pension Wise’ assessment which offers free and impartial government guidance about a person’s defined contribution pension options.
Long term unemployment will also have a big impact on longer term finances. The government’s £2bn Kickstart scheme to help young people on Universal Credit back to work is helpful, but experts point out that there’s no similar intervention for over 50’s.
As an age group that already suffered from employment discrimination, many in the over 50’s group have had to rely on the benefit over the last year. Analysis of government figures by Rest Less shows that the over 50’s make up one in four of those unemployed, with levels having increased by 34% from early 2020.
Money Magpie’s Birtles says financial anxiety among the over 50’s is largely heightened by being in the dark about their pensions due to financial uncertainty. “The assets held by company pensions fell when markets did last year, but by June things had recovered to the end of 2019 levels. However, this year has not started off well and markets (and therefore pension pots) could do very poorly,” she warns.
Tom Selby, senior analyst at investment firm AJ Bell, agrees. “When the UK went into lockdown in March stock markets plummeted, with many investors seeing the value of their hard-earned retirement pots fall by 20% or more in a matter of weeks.”
As the FTSE 100 index dropped by a third between the start of 2020 and April, pensions also fell. Those with high exposure to stocks and shares were most affected by the pandemic and would have faced severe pain in the short-term, but he adds that “stock markets have since recovered substantially, meaning many investors will have seen the value of their funds bounce back from those Spring lows”.
It would be helpful for people to have information on more ways to make money in retirement, says Birtles, “if they want to keep their retirement age – and also to take more ownership of their pensions and retirement investments to make sure they have the most they can for retirement.” She adds that even without Covid people had “very little idea of what was in their pension pots and how much they might get in retirement”.
Meanwhile PensionBee’s Savova says it’s more important than ever before for employers to offer some kind of guidance. “They should promote the benefits of Pension Wise, the government’s free pension guidance service for over 50’s. The exact moment a saver accesses their pension can have a big impact on their ultimate retirement income and, as the effects of coronavirus continue to bite, there’s an increased risk of more savers withdrawing large sums from their pensions.”
Savova says that, when considering how much to take out of a pension, it might be “more beneficial to think about any future withdrawals in percentage terms, rather than pounds and pence. If a saver sets a percentage figure for their withdrawals, their withdrawals will automatically reduce in size when markets are lower. This adjustment in thinking should help savers to avoid cashing in too much of their pensions at exactly the wrong moment.”
Tom Selby says: “Provided you weren’t planning to convert your retirement pot into an income in 2020 or aren’t in the early stages of drawdown, you should have been able to ride out the storm without needing to make big changes to your future plans.”
If you are planning to convert your pot into an annuity – paying a guaranteed income for life – or haven’t moved your money into cash or cash-like investments, things might be different.
“Anyone going down this route usually wants to take investment risk off the table as they approach their chosen retirement date precisely because if they don’t, a big market shock – such as we saw in March and April – could leave their retirement plans in jeopardy,” says Selby.
Put simply, someone who planned to buy an annuity in April and had all of their pension in equity investments might have seen their fund fall in value by 30% by the end of March.
Selby says: “They would then have had a choice: retire as planned on 30% less income, or delay retirement – if possible – and hope that markets recover.”
Selby adds that there are also people who take an income in retirement while staying invested (‘drawdown’) – this has become increasingly popular because it provides extra flexibility over, for example, how much income you take and when you take it.
“However, big falls in the value of someone’s investments in the early years of drawdown can be a problem if they are also making substantial withdrawals at the same time,” he says. It’s important for anyone taking an income in this way and who has suffered substantial falls in their portfolio to review their withdrawal strategy to make sure it remains sustainable,” he says.
“As a very rough rule of thumb, anyone withdrawing more than 4% of the value of their fund at age 65 might be at risk of running out of money in retirement. That means if you have a fund worth £100,000, taking out more than £4,000 a year from 65 – rising every year in line with inflation – you might be considered as being in a risky position.
“The extent to which a withdrawal strategy is sustainable or not will depend on your personal circumstances,” says Selby.
Meanwhile, the delay of the pensions’ dashboard further muddies the water for many, given it should have launched by now to make it easier for people to locate old pots from previous jobs.
“The delay in getting these up and running has been caused in large part by the desire to ensure the system is totally secure and maximise the types of pensions that are available to view on dashboards,” says Selby. “The plan now is to have dashboards available by 2023 which, while frustrating for many, is a sensible approach as getting this wrong would be disastrous.”
Selby advises that as your chosen retirement date edges closer, you might want to consider “tracking down any old pensions you have and consolidating them with a single provider”.
The Government’s pension tracing service is a good place to start. “It’s an opportunity to lower your charges, something which can have a profoundly positive impact on your retirement, particularly over the longer term,” says Selby.
“You may also be able to access greater choice and flexibility by transferring, both in terms of the investments available and the withdrawal options open to you,” he says, adding: “Be careful before transferring pensions. Some older-style ones have valuable guarantees attached which will be lost if you switch to a different provider, while some older ones also have exit fees which makes it expensive to move your money.”
Be on the lookout for scammers: Whenever you’re transferring or accessing your pension you need to be extremely wary of scammers, who are increasingly active in trying to steal your hard-earned retirement savings. The FCA’s ScamSmart initiative has lots of useful information and tips on how to spot and avoid different types of scam.