Five tips for retirement planning during a recession
While there’s no doubt the world is looking more uncertain for prospective retirees than it was at the beginning of the year, there are lots of things savers can do to help their pensions last longer.
Here are five tactics to help you make the most of your savings, regardless of whether markets are up or down.
1) Set the right investment strategy
Never has the saying “don’t put all your eggs in one basket” rang truer than now. Most pensions are usually diversified so your savings are spread across a variety of assets such as shares, cash, property and bonds.
Pensions can also be diversified across a range of different locations, so when some asset types or indices decrease in value, others are likely to increase. For example, the UK stock market (FTSE 100) is still deeply in the red this year, while the American Stock market (S&P 500) has largely recovered.
To ensure you can benefit from any gains a diversified portfolio may offer, you should avoid the temptation of moving your pension to a very low-risk investment strategy while markets are low. In the longer-term, savers with diversified pensions tend to achieve bigger pensions that last longer, so only consider a very low-risk plan if you are planning on withdrawing your entire pension imminently, ahead of an eventual market recovery.
2) Minimise withdrawals in the short-term
It can be more profitable to make pension withdrawals when markets are doing well, but timing the market is a fool’s errand. A better strategy is to minimise withdrawals and only take out what you need. You do not need to withdraw your full 25% tax-free amount if you are accessing your pension for the first time, so think about how much you really need before taking any action.
The exact moment a saver accesses their pension can have a big impact on their ultimate retirement income. If, for example, you were to withdraw a significant amount of money during a downturn, when the balance of your pension is lower, you may find that your pension struggles to recover over the next 10 or 20 years, as bigger pensions have bigger returns due to compounding. For this reason, you may wish to be cautious about your pension withdrawals during periods of economic downturn.
The same logic applies for annuities. For some savers buying an annuity with part of their pension and guaranteeing at least some of their income will give them the desired peace of mind. However, annuity rates are still considered low by historical standards due to the low interest rates we’re seeing. It’s important to remember that a reduced pension balance will also result in reduced annuity income, so buying an annuity immediately after a market downturn could result in a lower than desirable annual income which you won’t be able to improve upon.
3) Make sure you can access your money quickly, when you need to
Whenever you do decide to withdraw money from your pension, speed matters. It’s important to ensure your pension provider can process withdrawals quickly; 7-10 working days is usually considered good timing. PensionBee research conducted earlier this year, showed that 75% of retirees had to wait a month or more to withdraw their pensions.
In the one-month period between 21 February and 23 March 2020, the FTSE 100 lost a third of its value. A saver making a £1,000 withdrawal from a £20,000 pension would have withdrawn 5% of their pension on 21 February, while a saver making a £1,000 withdrawal would have withdrawn 7% of their pension on 23 March. The latter would not have benefited to the same extent from an eventual market recovery.
4) Think about your savings in %
When considering how much money to take out of your pension, it may be more beneficial to think about any future withdrawals in percentage terms, rather than pounds and pence. If you set a percentage figure for your withdrawals, your withdrawals will automatically reduce in size when markets are lower. 4% is considered to be a sustainable annual withdrawal rate if you want your pot to last through retirement. Adjusting your thinking in this way should help you to avoid cashing in your pension at exactly the wrong moment.
5) Consider increasing your contributions
Putting more money into your pension can feel counterintuitive during periods of market volatility, however a downturn can be an opportune moment to make up for lost time in pension contributions.
If you can afford to, you may wish to increase the amount you contribute to your pension as investments are effectively “on sale” at the moment. PensionBee’s research has shown that pension contributions during a downturn can boost a pension’s long-term value by up to 70%. This is due to longer-term investment growth, the generous tax relief applied to pensions – for every £1,000 a saver puts into a pension the government adds another £250, which many pension providers claim on your behalf – and due to historically low savings rates in cash-based products.
Romi Savova is CEO of online pension provider, PensionBee