Has Covid changed retirement planning?
The best-laid plans often go wrong and few things in life are planned as carefully or for so long as most people’s retirement. Yet, owing to the pressures of the pandemic, over 150,000 people have chosen to bring forward their retirement date, while over 200,000 have already accessed their pension savings sooner than they intended. At the same time, 1.5 million workers aged over 50 believe they will have to delay their retirement for pandemic-related reasons.
Two separate pieces of research have cast light on how Covid has thrown many retirement plans into disarray. The most striking figures come from a study by Legal & General Retail Retirement, which suggests as many as 1.5 million people (15% of those over 50) may need to retire later than they hoped. These individuals expect to delay their retirement by an average, of three years – and yet are more optimistic than the 26% of the same age group who simply don’t know when they’ll be able to retire, and say they may keep working indefinitely.
Interestingly however, many have been affected by the pandemic in the opposite way – in that they’ve had to bring forward their retirement. A quarterly survey by LV, has found that over 154,000 may have chosen early retirement due to factors such as redundancy late in their career, loss of income, a wish to minimise the risk of catching Covid, or simply reassessing their priorities.
LV found that 3% of those aged 55-64 had chosen early retirement as a direct response to Covid, while even more (4% or around 211,000 individuals) had already accessed some of their pension savings to supplement their income, due to suffering a financial hit from the pandemic.
The LV research also identified a significant proportion (in this case 11%) of people who fear they will never have enough money to retire on. Overall 34% of those hoping to retire within five years weren’t confident they would be able to afford to do so.
The most compelling aspect of these two studies is the way it shows the pandemic affecting retirement plans in very different ways. For some, the loss of income is forcing delayed retirement; for others, it has resulted in early retirement; while a third group are in a halfway-house situation, continuing to work while accessing some of their pensions and yet more people, even if not immediately affected, are reassessing their future plans.
The first thing to remember is that is never too late to improve your situation. Obviously, the earlier you take action the more effective it will be, but you can continue to improve your prospects for retirement income right up to the moment you retire – and in some cases even beyond that. This is where independent financial advice can provide the highest level of value.
Four steps to improving your retirement prospects at any age.
If you want to boost your confidence about having enough money in retirement, here are the most important steps to take:
- Find out your current pension situation
Step one is to find out where you are now. This means tracking down all your existing pension pots (and any defined benefit pensions you may have) and find out how much is in them. Your adviser can also help you decide whether to combine them or leave them separate (there can be pros and cons either way).
2. Estimate how much income you could get from those pensions
There are several different ways you can take income from pensions, and these tend to be a trade-off between guarantees and flexibility. Pension calculators can give you an idea of how much income you could obtain via a drawdown scheme, but bear in mind that this is only one method.
3. See if your projected income meets your expectations
A rule of thumb states that your income in retirement should be around 50-70% of your average working income, in order to give you a comfortable lifestyle. Remember to also include the State Pension in your estimates – but also consider that the State Pension is only payable at State Pension Age, if earlier retirement is going to be a primary objective.
4. Take advantage of your pension’s tax perks
One of the reasons many people neglect their pensions is that they aren’t fully aware of the scope for saving money through tax relief and tax-free growth. Put simply, everything you pay into a pension receives automatic tax relief at 20%. Because of the way tax relief works, this effectively boosts each contribution by 25% so that every £800 you pay in becomes £1,000 instantly. If you pay higher rate income tax, you can also claim an additional 20% relief, for an effective boost of 66% per contribution. There are limits as to how much can be invested each tax year.
In other words, even if you’re only a few months away from wanting to draw your pension, you can get big financial benefits by increasing your payments into it right up until that moment. You can even continue to pay into your pension after you start to access it, although the maximum amounts you can contribute are reduced. Another thing you can do is check that your pension is invested in the most suitable funds for your needs, objectives and risk profile.
The Covid pandemic has forced a lot of people to reassess their retirement plans but in the long run that may not be a wholly bad thing. Whatever your situation and whatever your age, it’s always worth checking your pension situation to ensure that you are on course for the retirement you want, and give yourself time to make any necessary adjustments.
If you have any queries or require any advice upon the above, please contact your usual adviser.
Craig
