Here, we put one of your questions to our experts. In this article, Ann-Marie Atkins, a financial planning managing partner from our Manchester office, and Bertrand Pole, a technical specialist based in our Haywards Heath office, give their opinions.
Q: I’ve been saving into a pension for my whole adult life and the aim was to retire later this year and travel the globe. Coronavirus has scuppered my travel plans but, much more importantly, I’ve seen the value of my pension drop to such an extent that I’m now wondering whether I can afford to retire. What can I do?
Ann-Marie Atkins, Financial Planner
While seeing the value of your pension drop can be terrifying, it’s important to realise that it’s likely there are a number of options available to you that should still allow for a comfortable retirement.
How you approach retirement income planning and take money from your pension has changed hugely since the introduction of Pension Freedoms in 2015. It’s important to note that everyone’s situation will differ so before I give advice to a client on a specific course of action, I explore every single option available to them and look at their entire financial position.
Assessing your needs
When it comes to retirement planning, you need to understand what you have and what you need for your lifestyle to be met and maintained. At Tilney, we use cashflow modelling to help with this. We gather information on the value of all your savings and investments, and any State benefits you may be entitled to alongside your pension. Then, we look at details of your outgoings and spending to see if there is a shortfall.
I think at the moment almost all of us are probably spending a little bit less on going out and enjoying ourselves but this is likely to change in the future. Cashflow modelling will take this into consideration along with inflation so it’s a really helpful way to see exactly what you have now and what you need in the future. It can also show where other sources of retirement income may lie and if it is practical to use them to fund your lifestyle.
Using savings and investments to pay for your retirement
While using your pension is probably the most obvious way to fund your retirement, you may still be able to retire without even touching your pension for now. Cashflow modelling will help demonstrate if you are able to do this.
Although it might not be possible to live off your savings and investments for the whole of your retirement, they may be able to cover your living and lifestyle costs over a shorter period (say one or two years) while you leave your pension invested. By not touching your pension in the short term, this can give your pension and the markets some time to recover and, hopefully, increase in value.
It’s important here to think about how you were going to fund your travel plans. If you were going to pay for them using your savings, you might need to ask yourself if you still want to travel once the restrictions are lifted and therefore earmark this money. On the other hand, if you are certain that you want to retire now, you might need to think about making a compromise. While I’m not sure how much your travel plans were going to cost, you might want to consider using this money to cover your living costs so that you can still stop working now and allow your pension some recovery time.
Drawing on your pension now
In an ideal world, your pension would be able to cover the cost of your retirement and travel plans, even with a drop in value.
This, however, is not the reality for many people and you may need to reassess your retirement plans and your pension itself. Under the Pension Freedoms rules, you have a number of options available if you are over the age of 55.
You could take a lump sum out of your pension. You can withdraw up to 25% of your pension as tax-free cash. This amount, also known as a pension commencement lump sum, can be taken as a single withdrawal or split up into smaller amounts. The rest of your pension will stay invested. If you take it in smaller amounts, you will have an uncrystallised amount that can continue to fluctuate in value. Over the shorter term, it might be that you can afford to retire by just taking the lump sum now and drawing on the rest of your pension later. By taking a tax-free lump sum from your pension, not only could it help you to meet your income needs but it can also help with your overall tax planning.
If you cannot afford to live entirely off of any tax-free cash and any savings or investments, you can still continue to work while accessing your pension. Although you might not be able to retire completely yet, you could look into the option of working part time. While this option isn’t always ideal, just working for a few more months on fewer hours could make a huge difference to your standard of living when you come to retire completely.
While still working, you could have phased access to your pension or perhaps look at income drawdown as an option. Income drawdown allows you to choose when and how much income to take. You can increase or decrease this amount in line with any changes to your lifestyle while still keeping your pension invested and again, giving it time to recover from this fall in value.
Bertrand Pole, Technical Specialist
I appreciate this must be a really frightening and stressful time for you when it should be a period in your life when you are starting to relax. That being said, with careful planning, there are still many options available that will allow for a financially comfortable retirement despite the drop in the value of your pension.
Can you afford to retire?
As Ann-Marie has mentioned, cashflow modelling is one of the most powerful tools you can use in retirement and financial planning. It answers questions such as how much have you got now, how much you are likely to have in the future, how much your pensions have gone down by and how much can you afford to spend both now and in the future?
If you are still planning on retiring in the not too distant future, it may be that you have to think about spending less money for a period of time and perhaps shelving your travel plans for a few years. By leaving your money invested, it will have more time to recover and hopefully increase in value.
Using your pension
If you can hold off on crystallising or drawing from your pension for now, then that’s a good option. Crystallising refers to when you start to take your pension benefits and benefit crystallisation events then trigger a test against the lifetime allowance.
Following the Pension Freedoms of 2015, the flexibility in pensions is much greater now than it used to be. You can secure an income by purchasing an annuity or you can withdraw a chunk of your pension, which, in pension jargon, is known as an uncrystallised funds pension lump sum or UFPLS. Say you have a pension fund of £90,000, you can take out £9,000 and leave the rest invested so you don’t have to come out with the whole pension at once. This might be a good short-term solution as you can just take out exactly what you need for now and leave the rest of your pension invested, the value of which will rise and fall in line with markets.
The one thing to be wary of when taking an uncrystallised funds pension lump sum is what would happen if at any point you decided you wanted to return to work. What you don’t want to do is trigger what is called the money purchase annual allowance. This would happen if you take more than 25%, or the tax-free cash allowance, out of your pension, and you go into drawdown and take an income. Your annual allowance would be reduced to £4,000, meaning you are only entitled to tax relief on your contribution up to £4,000. This would make it very difficult to save into a pension once you go back to work. So, if you’re going to dip into your pension but intend to keep working, you might want to consider just taking your tax-free cash allowance so you can still save into your pension.
Moving it all into cash
As there has been a lot of press coverage on the impact of volatile markets on investments, some people are tempted to cash in their pensions in full. But a knee jerk reaction of moving all of your pension into cash isn’t always the right option and it can be counter-productive. If you were to cash your pension in, then you would essentially crystallise all the losses you have experienced. At the moment, cash is not providing great returns at all and inflation will start to erode the true value of your capital.
This links to your own feelings towards risk. If you’re in a position where you can’t sleep at night because you’re worrying about the value of your plan and just want to safeguard it at this point, then switching to cash might be your only option. However, I cannot stress enough that markets can recover over time and historically have done so.
Speak to Tilney
Tilney’s financial planners help guide people through all of their options as they approach retirement. If you would like to speak to a local financial planner about your own situation, we offer free initial consultations over the phone. Although we can’t give you advice during this consultation, we can give you some guidance, let you know if we think you would benefit from personalised financial advice and explain the costs. You can book a free consultation online or call us on 020 7189 2400.
The value of an investment may go down as well as up, and you may get back less than you originally invested.
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This article was previously published on Tilney prior to the launch of Evelyn Partners.