One of the pandemic’s lesser effects is how it has upset many long-term plans. Many Brits have been forced to reassess their retirement choices and perhaps make snap decisions. But if your planned retirement looks suddenly in doubt, what should you do?
The best-laid plans often go wrong, as Robert Burns observed, and few things in life are planned as carefully or for so long as one’s retirement. And 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. But 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 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. These figures are even higher among those who have been furloughed or seen reduced income from the pandemic: 19% of those expect to delay retirement, while a very pessimistic 38% don’t know when or if they’ll be able to retire.
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=, the pensions & retirement specialists, 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.
The LV= Wealth and Wellbeing Monitor 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.
Meanwhile, 6% of those questioned said they expected to retire later than planned as a result. This is a lower percentage than in the Legal & General study, which looked at a broader age range – over-50s as opposed to over-55s – suggesting that the majority of those who fear a delayed retirement are between 50 and 55. This is consistent with the nature of pension saving, since a loss of income in one’s early fifties could be expected to have a more severe impact on a pension pot than one happening closer to retirement, when more savings have been accumulated.
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. And overall, 34% of those hoping to retire within five years weren’t confident they would be able to afford to do so.
How Covid affected retirement plans in different ways
The most interesting 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 (perhaps a more frugal one than expected); 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.
But this shouldn’t come as a surprise – rather, it’s as we should expect. One’s personal situation is at least as big a factor in retirement decisions as external events. The same pressures might push two people in very different directions, if they have different circumstances and goals. In fact this is the most important lesson in financial planning: the answer to the question ‘What should I do in this situation?’ is always, ‘It depends on you.’
This means it’s vital to keep tabs on what your personal circumstances and goals actually are. Tellingly, many people aren’t sure. In the LV= study, a remarkable 86% of people had not checked the value of their pensions in the past year – this in spite of the fact that pension providers send out annual statements. Even among those hoping to retire within five years, three quarters (75%) had not looked at their pension value in the past year. With this prevailing level of uncertainty over pension savings, it’s no wonder that 59% aren’t confident they will have saved enough for retirement. They simply don’t know how much they have.
Worry = avoidance = more worry
The low levels of knowledge even among those soon to retire appear to be so extreme, it is natural to wonder if the ignorance is at least partly deliberate. The LV= figures suggest that many are watching their retirement savings ‘from behind the sofa’ – so anxious about their inadequate pension pots that they actively avoid checking their balance. Naturally, this isn’t a useful strategy, as it leads to a vicious circle: if you’re too anxious to check your pension savings, you become more uncertain of the future, and thus even more anxious and even less likely to check your pension.
However, such pessimism is very often misplaced. Those who confront the reality of their pensions and take advice tend to find that the outlook is brighter than they imagined.
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. A financial adviser can help you do this, often via a free pension review. Your adviser can also help you decide whether to combine them or leave them separate (there can be pros and cons either way).
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 dependability and flexibility. The Unbiased Pension Calculator * 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, and exposes you to higher risk. The calculator also shows you what your pension’s final size might be if you continue to save at the same rate.
See if your projected income meets your expectations
A rule of thumb states that your income in retirement should be around 70% of your average working income, in order to give you a comfortable lifestyle. You can also see how your projected income compares to the average UK retirement income. Remember to include the State Pension in your estimates – but also remember that the State Pension age is rising.
The Unbiased pension calculator can also show you ways to adjust your pension contributions and/or retirement plans to boost your eventual income.
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 £80 you pay in becomes £100 instantly. If you pay higher rate income tax, you can claim an additional 20% relief, for an effective boost of 66% per contribution.
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.) One option you may wish to consider is transferring other investments into your pension in the final few years, since they are unlikely to yield a comparable return. Another thing you can do is check that your pension is invested in the most suitable funds for your needs – a financial adviser can help you with this.
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 saving progress to ensure that you are on course for the retirement you want, and give yourself time to make any necessary adjustments.
A version of this article was previously published by Unbiased 3rd February 2021