Since the outbreak of Covid-19, the effect on the global economy has been widespread and disruptive, with sharp falls on stock markets pointing to a recession.
Experts are anticipating this being a temporary slump and are advising investors to either hold tight or move to a potentially higher-risk strategy to take advantage of the sell-off in equities over the long-term.
However, there is a specific group for whom the situation may not seem quite so obvious – those on the brink of retirement. They have been impacted one the one hand by reduced pension values, but also face the challenge of cuts to annuity rates.
Zoe Bailey, chartered financial planner (CFP) at Tilney, says: “This is obviously a very uncertain and potentially scary time for everyone as we head in to the unknown and worry first and foremost about the health of our families. But those about to retire face a myriad of problems, with pensions values being hit hard by the stock market downturn, and also annuity rates being slashed as bond prices have rallied and their yields have fallen.
“Obviously the situation will change from person to person depending on your circumstances, but the most important thing to say is don’t panic and think carefully before acting.
“If you are able to, delay purchasing an annuity, where you do not have a guaranteed annuity rate built in, as the value of the income will be based on the value of your pension pot at the date of purchase. You should also review the option to have a phased annuity, which you can take over time rather than locking in a rate today.
“Reducing your risk now will mean you may not fully participate in the eventual recovery in equity markets, but at least you will reduce your exposure to a potential further downturn.”
“This will help when markets pick back up, as we expect them to once the pandemic has receded. Also, if you are able to, delay taking tax free cash – up to 25% of your pension – if it is not urgent as this is also based on the value of your pension which will not be at its highest level during the current climate.
“If you are in the position where you have emergency cash savings, this is exactly the time to use it when you need. Don’t feel you can’t touch it during these times. If your pension income has suddenly reduced, for example, then use your cash reserves to top it up. You can rebuild it again afterwards with a plan from your financial adviser.
“As ever with your finances, you should only do what you are comfortable with, but my main guidance would be to not make any rash decisions. For the most part, even for those already in retirement, pensions are invested for the long term as they are specifically designed to support your income needs throughout retirement. For many people, it will simply be a case of riding it through.
“However, if you are feeling nervous about the future, or if the situation has made you feel more financially vulnerable than you predicted, then it would be worth looking at the risk profile of your portfolio as a whole. Reducing your risk now will mean you may not fully participate in the eventual recovery in equity markets, but at least you will reduce your exposure to a potential further downturn.
“Communication is key, and I would advise any one to speak to a financial planner about the best way forward. Whatever you do, now more than ever, don’t just automatically opt for the annuity offered by your existing pension provider as so many people do. It really does pay to scour the market when selecting an annuity but it is also important to consider the wider options with a good financial adviser before taking such a major decision.”