We’ve seen some remarkable examples of resilience as people across the world adjust to life under lockdown, and the threat to our families and health.
But in some ways, it’s harder to feel as resilient about our finances because many of us feel almost entirely out of control – we may not be sure where our money is invested, how much it’s worth today, how much it will be worth in six months’ time and whether we can even afford to retire.
Here are seven things to think about if you’re approaching retirement and were planning to start taking money from your pension savings, at about the same time that global markets have headed south.
1. How much time you have
Time is one factor you can control. Do you need to retire now? Could you delay or at least move to working part-time? Although moving to part-time work may not be viable right now, if you’re able to once the current situation improves, there’s the potential double upside of maintaining your contributions into your pension plan for longer and also delaying taking money from your pension savings, which could give markets time to recover.
2. Your outgoings
If you can’t delay retirement or move to part-time working, can you look at cutting your outgoings temporarily? For example, look at your budget and do things like cutting non-essentials, reviewing utilities bills and checking your direct debits. This could help reduce how much you take out of your pension savings each month. Longer term, relocation or downsizing are other options people often consider if they need to cut their outgoings. You can find more tips for saving and budgeting from our four money experts in this article.
3. Any cash savings
Do you have other savings you could use to help tide you over so that you can reduce the impact of taking money from your pension savings when their value has fallen? You make losses in financial markets when you’re forced to sell, for example selling investments at a time when markets are weak. If you can use any cash savings, this could give your pension savings and any other investments you have, some time to recover once, as expected, markets start to recover.
4. How much income you want to take
Have a think about whether the amount you plan to take from your pension savings each year is sustainable. As a rule of thumb, divide your total pension savings by 25. This will give you a rough guide for what many financial advisers will say is a sustainable amount to take out each year in retirement and not run out of money (over a 30-year timeframe). If you add this to other sources of income you have, and your State Pension, is it enough?
5. Where you’re invested
Now isn’t the best time to start changing where you’re invested, as this could lock in losses. But when markets start to recover, as they’re expected to, you may want to consider moving at least some of your pension investments into lower risk funds, for example those which have a higher proportion in assets like bonds and cash-type investments (often called money market investments). Shares (or equities) will typically give you higher returns over the longer term but are likely to give a much bumpier ride. If you don’t need to make your pension savings work so hard, think about whether it’s worth holding these higher risk assets over the longer term.
6. How much you take out in the early years
If you were planning to take a larger amount from your pension savings in your early retirement years, you may wish to consider reviewing those plans. The less you take out in the early years, the more your pension savings have a chance to keep growing in value. Pension savings are like building a snowman – the bigger the ball you start with, the faster it’s likely to grow. Start with a smaller amount and your money is likely to grow more slowly.
7. Getting advice
What impact does the reduction in the value of your pension savings have on your overall retirement plans? Is it painful but unlikely to mean you can’t afford your retirement long term, or is it causing you to panic and worry that you can no longer afford retirement? If the answer is the second one, I’d suggest seeking help from a financial adviser on your personal circumstances and have someone look over ways to adjust your plans to help you get back on track.
You should be able to find a good financial adviser to do this for a fixed fee at unbiased.co.uk – advisers typically charge between £150 and £250 an hour.
If you can’t afford a financial adviser, the Money Advice Service website provides useful and impartial government-funded advice. And the Pensions Advisory Service website offers further guidance and support about how the impact of coronavirus might affect your pension savings or investments.
The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Past performance is not a guide to future returns.
All information is based on Boring Money’s understanding in April 2020.