Retiring soon: how to mitigate the effects of Covid-19
This short post explores the issues facing those approaching retirement, as the potential impact of the coronavirus pandemic on pension and retirement income becomes clearer.
Covid-19 and the resultant global shutdown has had a significant impact on the stock markets, combined with cuts in interest rates as the world economy stalls.
Here in the UK, the Bank of England base rate was cut to 0.1%, the lowest in the BoE’s 325 year history, while the FTSE 100 suffered an 8% fall in one day on 9th March 2020, the largest since the financial crash of 2008..
Is this a cause for concern for investors? Well, yes and no.
Investing should be for long-term goals, and those investors with a long-term timescale like younger savers have decades to recoup losses. For those investors, patience is the name of the game.
However, those planning to retire in the short term, with limited scope to ‘catch up’, face a difficult challenge.
So what can you do?
Step one is to consider what income you will need in retirement. What are your outgoings now, how will this change when you retire – for instance, will your mortgage be paid off by then – and what are your plans and aims for retirement?
Once you have determined the income you will need in retirement, you should look at what income and assets you have in place, from workplace pensions and private pensions, to your state pension and any other income and assets you have. This will illustrate whether you have just enough, a surplus, or a shortfall, and allow you to understand what changes you may need to make now.
Step two is to consider how best to begin taking income from your pensions, savings, and investments when you do retire.
As savings, investments, and pension pots have been diminished by the impact of Covid-19, care should be taken about how much income you take from your retirement pot while this money remains invested – after all, any money left invested has time to recover, while taking money out now crystallises the losses caused by the coronavirus, guaranteeing that you will lose money.
Now is also the time to consider how you will take income in retirement. For instance, exchanging some or all of your retirement pot for an annuity policy may not seem a great idea, and for many it won’t be – after all, you would be realising your investments now at an historic low and exchanging this sum for income when annuity rates are poor. With less or no money left invested, there is no prospect of recovery. However, while recovery over the longer term is anticipated, there are no guarantees markets or annuity rates won’t fall further in the short term.
So, for some people buying an annuity may make sense, as securing guaranteed income now which will meet many or all of your retirement income needs provides security and reassurance as you enter retirement. This could provide guaranteed income for the rest of your life, or you could buy an annuity policy with a fixed term. As always, these decisions depend on individual circumstances.
Step three is to consider the effects on the income available to you from the assets and investments you already have. For instance, many people rely, in whole or in part, on ‘natural’ income from investments in retirement. Natural income is the dividend your assets produce while leaving the capital untouched, the cream off the top – but as the pandemic affects the economic climate, many companies have slashed dividend payments, meaning investments that produce natural income will be providing less today. With natural income reducing, investors face a choice – learn to live with reduced dividend income now, or start taking from the capital, reducing the sum invested and therefore future returns.
Step four is to consider other alternatives. For instance, could you work longer than you planned, or can you meet any shortfall in the short term through alternative sources, like rental income? Do you have wealth tied up in your home or other property that could be realised to provide you with income or capital now while your pensions and investments remain invested until markets recover?
As always, there are no black and white answers and no ‘one size fits all’ solution. What will be best for you won’t be best for somebody else and vice versa. Big financial decisions require professional advice and planning to design a retirement strategy tailored to your circumstances, needs, and aims.
Speaking to This Is Money, Charlotte Jackson, head of pensions operations and consumer protection at the Money and Pensions Service, said: 'For those facing particular hardship or needing to retire now, the pensions freedoms introduced a few years ago allow more flexibility in how they can do so. The right option will depend on your personal circumstances, so it's important to seek out free pensions guidance or speak to a regulated adviser’.
This blog post is not financial advice and is not specific to any individual. This article is intended as generic guidance and comment only, and does not constitute any form of financial or investment advice or recommendation, which is always specific to individual needs. You should not take any actions on the basis of this article, and should take appropriate professional advice instead.
This post was published in April 2020. Legislation and policy may change over time.
All blog posts are written by Dylan Roberts in a personal capacity and do not necessarily reflect the views of Lighthouse Financial Advice Ltd, Lighthouse Group, Quilter Financial Planning, or Quilter plc.