The decision made by the British public to leave the European Union last month has triggered financial uncertainty in the British economy, and this in turn has rippled through to global markets. Those who are investing for the long-term need not feel overly worried about current market volatility. But for those who need to make large financial decisions now, such as whether or not to retire, they will feel that they have a very difficult set of cards in their hand which they need to play.
Those who are about to retire may have very good reason to feel concerned about their financial situation, and will need to think carefully about the decisions they are about to take. The vote to leave Europe has thrown up new concerns and very real problems. For instance, annuity rates have fallen further, which means those looking to exchange their saved pension fund for a secure income for life will currently be offered a lower income than would have previously been available. The value of Sterling has fallen, so the cost of living could rise in the coming years. Mark Carney, the Governor of the Bank of England, has suggested that interest rates will also fall which is bad news for cash savers. Market volatility, whilst an expected consequence of stock market investing, is particularly concerning at a time when the investor wants to withdraw their money – post Brexit we saw an immediate slump in the value of the FTSE 100, which has now rallied to an 11 month high, and who knows what will happen next. In summary, the vote to leave Europe has created a perfect storm scenario for those who are about to, or considering retirement.
If you are about to retire, how do you start to prepare?
The first step for those considering retirement is to understand the make-up of your current pension savings. Most people’s pension funds will contain a mix of different asset classes; these will behave differently in different market conditions, and some will be low risk, some high or higher risk, so it is important to know what your pension contains. Some pension funds have an automatic life styling option. This means that as you approach your chosen retirement age, your pension fund is gradually de-risked by drip feeding money out of riskier investments and moving money into more cautious funds or assets and cash. If your money is in this type of pension arrangement and you are close to your chosen retirement age then your money may be reasonably protected at this point from market losses, but you are likely to benefit less from market gains. Not all pension plans have this arrangement, so if yours does not, then it may be a good time to review your fund and see whether, or how, it has been affected by recent events. A financial adviser can help you determine your current financial position.
What decision do you take next?
The next step is to establish how much income your pension savings can generate for you in retirement and how you would like to structure that financial arrangement. You have the choice of whether to take a fixed guaranteed income which can pay you an agreed sum for the rest of your life called an annuity, or to invest your money, withdrawing an income on a regular basis, or on an ad hoc basis as required. Some investment products offer income guarantees, which can help provide more security in your retirement income. You don’t have to choose just one of these routes to drawing your pension income; if you want some security and some flexibility you can use a combination of these options.
What happens if the figures don’t add up?
It is often at the point of retirement that many people realise that they don’t have enough saved and that their income for retirement is not going to be the sum they had expected to receive. There are ways to try to rectify this; some people choose to defer taking retirement, thus enabling them to continue to contribute to their fund, and by pushing back their retirement age, when they do take a pension income it will be calculated to provide for fewer years. Others may take a phased approach, taking a proportion of their pension income and then working part time to supplement their income. If you are faced with insufficient savings then a financial adviser can help you to develop and plan your financial goals for the short time frame you have available. They will also make sure you take advantage of all the available tax incentives linked to pension plans to help you achieve this.
What is clear is that there has never been a more important time to take financial advice. Taking financial advice at this point will ensure that all the retirement options have been considered and any personal circumstances, such as your health are considered. Simple factors, such as an existing medical problem which will reduce a person’s statistical life expectancy can in some cases secure a person a higher annuity income, should this be the income route they wish to take. In the uncertain post-Brexit period, those approaching retirement will need to be open-minded about their retirement plans.
If you are approaching retirement then it is important you speak to your financial adviser to discuss all the options available to you.