If you had planned to retire in 2021, then you are likely to be looking closely at your pension to see how much it is now worth and what your pension income might be. This guide looks at your options if you are concerned about retiring because of the Coronavirus pandemic.
Coronavirus has caused the value of stock markets across the world fall in value and, as a result, the value of many pensions has also fallen. However, the value of stock markets has started to recover, and if you have a contributory pension that is invested in equities, then you may have seen the value of your pension rise and fall. While the value of stock markets has improved, there is the potential for continued volatility as the world continues to battle Coronavirus, and this could mean pension values will also continue to fluctuate. If you have many years before you are due to retire and won’t be using drawdown from your pension soon, then the value of your pension has the potential to recover.
If you have a defined benefit (final salary pension), then your employer and the scheme trustees will be responsible for managing the performance of your pension and your future pension income is not affected by changes in the performance of the stock market. The state pension is not directly affected by changes in the stock market.
If you are closer to retirement and want to use pension drawdown now, then a reduction in the value of your pension pot may have a big impact on your income levels. As you approach your retirement age, many traditional personal pension providers will switch your investments away from equities and move these to cash, gilts or bonds where there is less risk of losing money. If this is the case with your pension, then you may find that your investments have been shielded and the losses reduced. If you have a self-invested personal pension (SIPP), this won’t apply.
A financial adviser can help you to work out the most efficient way to access your pension from a tax perspective, the pros and cons of an annuity and to check that your income will last for the duration of your retirement.
If you were planning to retire in 2020 and your pension value has reduced meaning retirement is now not possible, then you could continue to work and delay retirement, take a phased retirement or retire and work part-time or, if you are a homeowner, use equity release.
The benefit of working for longer will be the opportunity to keep contributing to your pension and allowing your investments time to recover and grow, although stock markets may remain volatile while Coronavirus remains a global health risk. A phased retirement is where you only drawdown the cash you need right now and leave your remaining funds invested. If you do this, make sure you consider taking any tax-free-cash at the same time, as this must be done at the same time as you allocate some of your pension pot for drawdown. This will give your remaining funds an opportunity to recover and grow. A larger pension pot will be especially beneficial if you plan to buy an annuity at any point, as a higher value might gain you a greater lifetime income.
Alternatively, you could take your pension and work part-time to top up your monthly income – but you need to consider what would happen if you lost your part-time job.
If you are a homeowner and over 55, then equity release could provide you with a tax-free lump sum.
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If you are one of the millions that have been on furlough this year, this will have had an impact on your pension contributions. You and your employer will still make the same percentage contributions, but on furlough your pay was reduced to a maximum of 80% of your full pay. This means the value of your monthly contributions will be lower than before you went onto furlough.
You could consider increasing your percentage contribution once you return to working full time.
If you need access to cash, it may be tempting to cash in your pension. However, you will be charged 55% in income tax on any money you release. There are firms that offer to manage cashing in your pension for a fee. Cashing in your pension early is not usually advisable and any decision should be made in consultation with a qualified independent financial adviser who is authorised by the Financial Conduct Authority.
If you are worried about your pension and need more information, then you can speak to either The Pensions Advisory Service on 08000113797 or Pension Wise on 0800 138 394.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.