Can I Still Retire Early If My Pension Is Down?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincoln or other local offices.
2020 has been a challenging year so far for many UK pensioners. In January, the markets still looked fairly positive as investors sat on a bull market lasting almost 11 years. By the end of Q2, however, COVID-19 and the resulting lockdown had cast a shadow over the economy, stock markets and pension pots. By the end of February, pension funds were down by an average of 5%, with those planning imminent retirement most affected.
Some news outlets have claimed that the events surrounding COVID-19 likely now mean that pensioners will either have to accept a lower income, or postpone their retirement plans. Yet are these the only two options, particularly for those hoping to retire early (i.e. aged 55+)? In this article, our Lincolnshire financial advisers here at Castlegate explore some of the implications of a down market (e.g. Q1 2020) for early retirement plans.
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Accept realities – without panicking
Few financial advisers would argue that the market volatility of 2020 is insignificant for those approaching retirement and for pensioners. It’s important to take stock of what’s happening, but not resort to impulsive decision-making about savings and investments. Here are some facts our financial advisers at Castlegate would urge people to take stock of in May 2020:
- The markets have stabilised somewhat with some encouraging early signs of modest recovery. On the 15th May 2020, for instance, the FTSE 100 is up from its 4,993.97 low-point on the 23rd of March by standing at 5,799.77. Yet this is still far away from its 2020 high-point on the 12th of February, where it stood at 7,534.37.
- Those seeking to buy an annuity right now are likely to face some difficult decisions. This is because annuity rates are down following the decision by the Bank of England (BoE) to cut interest rates to 0.10% in March 2020. Pension pots are also likely to be smaller in light of coronavirus-induced market decline in Q1, which leaves less capital to purchase an annuity which offers a decent retirement income.
- For those retired and in drawdown, it’s a good idea to consult your financial adviser about your options if your pension has fallen. Taking money from your investments during a period of market volatility is likely to disproportionately reduce the size of your pension pot over the long term.
- For those with defined benefit (or final salary) pensions, bear in mind that the investment risk is borne by your employer. In a sense, therefore, any down market or volatility is less likely to directly affect you. However, the prevailing economic conditions could affect your employer, who has promised to pay you a guaranteed lifetime income in retirement.
- The state pension is not affected by price movements in the stock market. However, those looking to retire early will not be able to access their state pension until they reach their state pension age (i.e. 66 in October 2020).
Implications for early retirement
As we’re sure you will have guessed by this point, the market decline in Q1 2020 and current volatility raises difficult questions for those who have been planning early retirement in recent years. Here, it’s important to seek financial advice if you have not already done so.
It might be, for instance, that you need to consider postponing or declining some/all of your 25% tax-free lump sum, which most people can do after the age of 55. Others might need to think about working longer to give their pension pot more time to recover, or accept a lower retirement income if you are determined to stick to the retirement date you originally had in mind. For some, this might involve cutting back on some of the more “luxury expenses” you had planned for your retirement.
Many people might be in the fortunate position of having other sources of income in retirement to draw from, such as business income or rental income from a Buy to Let. There might also be those who have assets they would like to sell (e.g. a second home) which could release more capital to put towards your pension pot. Regardless of your financial goals and situation, it is crucial to not panic or make rushed decisions based on fear or other strong emotions. Take time to speak with your financial adviser and assess the full range of options available to you.
Conclusion & Invitation
Those who have been approaching their planned retirement date within the last five years are likely to have already invested heavily in lower-risk assets (e.g. cash and bonds) to mitigate the impact of a possible down market, such as the one witnessed in Q1 of 2020. Nonetheless, the fall out of COVID-19 and the lockdown upon pension pots has still been considerable, and it’s likely to have negatively impacted even the most “cautious” investment approach to a pension portfolio. Seeking professional financial advice, therefore, is likely to be a good idea during these challenging and unprecedented times.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense: