This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxford).
It’s no secret that 2020 has been a volatile year for the UK stock market – and, consequently, many pension funds which are invested heavily in them. On January 17 2020, the FTSE 100 stood at 7,674 before falling sharply to around 4,993 by 23 March as the reality of the pandemic set into the markets. Writing in August 2020, equities have been steadily rallying but growth still stands at a lower point than it did at the start of the year with the same index sitting at just over 6,104. Many people approaching retirement are, quite understandably, looking at the situation and asking: “Can I still retire in this volatile market environment?” Notwithstanding our initial thought that investing heavily or exclusively in the FTSE 100 is a bad idea; as we favour Global equities rather than purely UK exposure, it’s a good question, and one that our Oxford-based financial planning team attempts to offer some reflections on here.
Retiring in a volatile market
If you’re hoping to retire soon in the wake of the COVID-19 pandemic, then one key thing to consider is the diversification of your pension(s). Investing largely in equities (stocks), for instance, in the years leading up to your retirement date might not be the wisest decision if your primary goal is to preserve your wealth for that specific time, perhaps to pay off liabilities like a mortgage or car finance. Instead, it is a good idea to discuss your investment options with your financial planner and consider moving to a more “cautious” strategy – where, perhaps, your portfolio leans more towards “safer” assets such as cash and government bonds.
Another important aspect of your pension(s) to consider when retiring in a volatile market is your 25% tax-free lump sum. If you have a £300,000 pension pot, for instance, then in 2020-21 you could withdraw up to £75,000 from your pot once you reach age 55. However, be extra cautious about making a large withdrawal during a pandemic. After all, if your pension has fallen in value in 2020 (like many would have if in UK dominated funds), then doing so is likely to disproportionately affect the size of your pot and its sustainability into your retirement.
Thirdly, when retiring in this pandemic, or in any very volatile period really, you need to be mindful of your withdrawal rate in the years ahead (assuming you will be using drawdown in retirement). If you planned on taking 5% a year from your pot originally, for instance, then this might not be sustainable in the long run if your pot has shrunk in size. For some people, it may, therefore, make more sense to rely more on cash savings (e.g. in an ISA) to fund your retirement lifestyle in the short term – thus giving more time for the equity investments in your pension to recover.
Helpful retirement “pillars”
Two types of pension are likely to be beneficial for a potential retiree in a volatile market. First, your state pension is not affected by market fluctuations and can, therefore, form a crucial part of your essential retirement income. In 2020-21, the full new state pension is £175.20 per week – or £9,110.40 per year – and requires 35 qualifying years of National Insurance Contributions (NICs), so this is usually worth aiming for.
Second, those with final salary pensions (or “defined benefit” pensions) are also, arguably, in a strong position to consider retirement during hard market conditions. This is because the income you will receive in retirement is guaranteed by your employer, and any shortfall in investment performance is compensated by them.
Although we have chosen the FTSE-100 Index for this article, you should remember that an Index is just a number and not an investment philosophy. If you are concerned about imminent retirement or interested in starting a conversation about your financial plan and how best to plan your own future retirement lifestyle, then we’d love to hear from you. Get in touch today to arrange a free, no-commitment consultation with a member of our friendly team here at WMM.
You can call us on 01869 331469