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Michelle Monck

Michelle Monck

Consumer Finance Expert
Published: 03/12/2020

Written by Vince Smith-Hughes, director of specialist business support at Prudential UK

This article is not intended to be financial advice to any individual. The views expressed are those of the author and does not endorse the content.


The pandemic has brought many terrible consequences. As well as the tragic human cost, it has also had a significant impact on financial markets. At one point in March, the FTSE 100 (the index tracking the 100 largest companies in the UK) was down by over a third compared with the position at the start of the year. This came as quite a shock to many people, as prior to this year we have seen a significant bull market during the past five years, part of the longest bull run in history. Since March, we have seen markets recover at least partially, dependant on where you are invested.
One particular group who are extremely concerned are those that had planned to retire in the next five years. But how will your pension be affected? Let’s take a look at the different types of schemes you may have.

What type of pension scheme do you have?

A defined benefit scheme

These types of schemes, also known as final salary schemes, provide a guaranteed level of benefit to their members. So, even if the underlying assets in the scheme have taken a hit, the retirees receiving an income are largely unaffected. I’ll therefore concentrate the remainder of this article assuming you are not lucky enough to have this type of arrangement to meet your retirement income needs.

Personal pensions, self-invested personal pension (SIPPs) or employer defined contribution schemes

With all these schemes, the principle is contributions by you and/or your employer are paid into a scheme, and the eventual fund at retirement is then used to pay income. This can be done in one of two main ways, either via taking income directly from the fund – known as income drawdown – or by buying an annuity, effectively using your fund to buy a guaranteed stream of income for life. In both cases the income is subject to tax, though a 25% tax-free cash sum can normally be taken from the fund initially.
There are now no longer any restrictions on how much of the fund can be taken in income drawdown – all of the fund can be taken at once if desired – though be warned this could incur a large tax bill. In general terms, drawdown has ultimate flexibility but no guarantees, whereas an annuity has an ultimate guarantee but no flexibility. A point often overlooked is that it is possible to have some of each. A great starting point to understand the choices available to you is Pension Wise – a free to use body set up by the Government that can give you more information on your options if you are over the age of 50 with a pension pot.

Calculating what income you need

To establish how affected your retirement plans are, the first and most obvious starting point should be to work out how much income you are going to need. Consider what is essential spending, such as food, paying household bills, rent etc. Then also consider what would give a more comfortable existence, for example with holidays, meals out etc.
Once you have a number in mind, you can get an idea of how close – or otherwise – you are to this figure. It is an extremely rough rule of thumb, but you could ascertain a potential income figure by using say 3% of your pension fund to pay income every year. Professional opinion differs on what number to use, but most figures quoted tend to be somewhere around this number, though of course there are no guarantees and the actual figure will likely be lower or higher than this. You will also need to factor in income from any other sources that you may have, as well as any state pension. Get your forecast for the state pension.

So, what do I do if I can’t get the income I need?

There are a number of options worth considering, none of these being exclusive. It is also not an exhaustive list!

Retire later

If circumstances allow, you could retire later, allowing you to save more for your retirement and potentially see funds increase in value (though this is by no means guaranteed), and ultimately the funds will be required for less time as your retirement time period will be shorter. This is obviously unpalatable for many, however it is a stark reality that some will have to consider. One other option might be to continue working but do so only on a part-time basis.

Pay more in

Paying more contributions into your pension may well be an option, and of course will boost the fund. How much can be paid in is beyond the scope of this article, but it could provide a significant boost to your fund in some circumstances, assuming you have the means to do so. Remember, tax relief will be available to many people if they still are still working, which will help boost their fund further.

Reduce income

Again, this is not palatable, but consider if you can manage on less income. Assuming you are in income drawdown, the lower the income you take, the less strain on the fund there is.

Invest your fund more speculatively

It may be that you believe investment returns can make up for any shortfall. Be extremely careful if this is the route you are considering, as it could go very wrong. In general terms, the more speculative the investment, then not only is the potential gain larger, but also the potential loss. You could end up exacerbating any problem even more with this approach. These comments apply doubly if you choose to go into drawdown and start taking an income. In short, at any time you take an income when the fund has fallen, you are crystallising your loss.

On the subject of investing speculatively, be very aware of anything that looks too good to be true, because it probably is. There are many convincing scams out there, all of which are likely to result in you losing some or all of your pension pot. Check out the Financial Conduct Authority’s (FCA) website, and note what the warning signs are.

Is there another solution?

If all of this sounds daunting, then that’s entirely understandable. However, help is at hand. It may be very sensible to consult a regulated financial adviser who can help you with all of the above. They can work out a plan that is bespoke to you, and one that you are comfortable with, balancing your requirements with what is realistically achievable. Importantly, this can be in addition to discovering more about your options by speaking to Pension Wise.
One thing is certain – when and how to retire is a massive decision and needs careful planning, and the sooner you start the better.


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