31st March 2020
The turbulent markets we are experiencing at the moment are concerning for everyone, but especially for those who are in a defined contribution (DC) pension scheme and looking to retire.
Since the Freedom and Choice in Pensions rules came into place in 2015, anybody aged 55 or over can access their pension. However, retirement planning is crucial, particularly when stock markets are volatile.
With this in mind, WEALTH at work, a specialist provider of financial education and guidance in the workplace supported by regulated financial advice for individuals, has created a list of things to consider if you are due to be retiring soon.
- Don’t cash out in panic! – No one knows what is going to happen, but what we do know is that if you cash out now, you will not only be taking money out of your tax efficient pension but you may also lose out when markets recover.
- Don’t pay unnecessary tax – As well as the risk of potentially selling at the bottom of the market, the other danger of cashing out is that you risk paying a lot of unnecessary tax. Usually only the first 25% of a defined contribution pension is tax free; the remaining 75% is taxed as earned income. By taking your pension as a cash lump sum not only will you be selling when markets are low but you may end up with a big tax bill!
- Consider delaying retirement or working part time – There is every chance that everything will look very different in a few months’ time. If you are able to delay your retirement, it may be worth considering this. It would give some time for markets to hopefully recover, and give you more confidence in leaving the workforce.
- Pensions are not the only source of income in retirement – When it comes to retirement, there are many assets such as cash ISAs and general cash savings, which can be used as potential sources of income in addition to your pensions. If you want to give your pension some time to recover, you might want to use these other savings first.
- Shop around – Make sure that you shop around before you purchase any retirement products. The FCA found that those who go into income drawdown could increase their annual income by 13% by switching from a higher cost provider to a lower cost provider. It is important to not only check fees, but make sure it suits your needs, and that you can withdraw cash as and when you want it, and for as long as you need it.
- Regulated financial advice can be an investment – Talking to a regulated financial adviser can be reassuring in these concerning times, and can actually cost the same, if not less than buying retirement products, such as annuities, through some online brokers. It can also be seen as an investment as an adviser will look at all of your assets, work out the most tax efficient way for you to fund your retirement and then put a bespoke plan in place for you, which will support you throughout retirement.
- Protect yourself from scams – Unfortunately turbulent times like these, when people are concerned and vulnerable, is often when scammers see an opportunity! It is important to be on your guard. Scammers tend to sound completely legitimate when they contact you. It’s easy to see why so many people are fooled, and it isn’t small amounts of money which are being taken. Findings from the FCA and The Pensions Regulator show that victims of pension scams could lose 22 years’ worth of savings within 24 hours. So, whatever you’re planning to do with yourretirement savings, it’s vital to check whether the company that you’re planning to use is registered with the Financial Conduct Authority (FCA) https://register.fca.org.uk/. You can also visit the FCA’s ScamSmart website which includes a warning list of companies operating without authorisation or running scams fca.org.uk/scamsmart.
Jonathan Watts-Lay, Director at WEALTH at work, comments;
“If you are due to retire soon, these volatile markets are understandably concerning, but it important not to panic. Instead, consider using your state pension and other assets for income in the short term, or even consider delaying your retirement, to give your pension time to recover. Probably the most important investment you could make is to engage with a regulated financial adviser who can take your personal situation and objectives into account and come up with a sensible plan. You may find that regulated financial advisers can be accessed via your employer or pension scheme so this is a good place to start.”