Covid-19 threatens retirement planning stability

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Covid-19 threatens retirement planning stability

Covid-19 has caused growing uncertainty surrounding the future of retirement planning, to according to pensions expert Romi Savova.

Romi Savova is chief executive of PensionBee, an online pension provider service which she says was created to simplify pension savings in the UK. 

But how complicated are pensions savings? And has Covid-19 caused problems for Britons when it comes to putting money aside for retirement?

Speaking to FTAdviser in Focus, Romi Savova discusses the impact of the pandemic and Brexit on the stability of pension planning. As she says: “There’s no easy way to put it: the world has never been more uncertain for prospective retirees.”

FTAdviser: How can advisers encourage clients to build a retirement pot following the uncertainty covid-19 has placed on retirement planning?

Romi Savova: There’s no easy way to put it: the world has never been more uncertain for prospective retirees. 

But it’s important for advisers to stress that pensions are a long-term investment and although it can be uncomfortable, short-term fluctuations are normal and to be expected from time to time.

I would encourage savers to only withdraw what they need, at the time they need it.

They are unlikely to cause any lasting damage, especially if a client has no plans to retire in the next few years. 

While setting the right investment strategy and managing your pension contributions are crucial, regardless of whether markets are up or down, the current economic environment has made them even more pertinent.

Advisers should reiterate that the best pension investments are usually diversified. Meaning they are invested in a mixture of assets such as shares, property, bonds and cash – spread across global markets, from North America to Asia – to protect against the risk of any single type of asset or location. 

In the longer term, savers with diversified pensions tend to achieve bigger pensions that last longer. Savers should avoid the temptation of moving their pension to a very low-risk investment strategy while markets are low.

As there is a good chance they will miss out on the eventual market recovery. Low risk plans should usually only be considered if a saver is withdrawing their entire pension imminently.

FTA: The pandemic has hindered annuity growth with a marginal growth over the past year. Is there any support for pensioners who have been hit by this?

RS: Annuity rates have really suffered in the past year, and are still considered low by historical standards due to the low interest rates we’re seeing.

It’s important for savers 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 - and irreversible - annual income. 

Therefore if a saver is considering an annuity, but hasn't yet bought one, it might be worth waiting a little longer. Additionally, inflation appears to be on the rise, and that may soon be complemented by higher interest rates and annuity rates. 

For the pensioners who have been directly impacted by low annuity growth, annuities are unfortunately usually irreversible. The Pensions Advisory Service provides independent and impartial information, free of charge, to any member of the public who may be looking for additional support in this area. 

FTA: Despite the pensions shortfall, are there other ways for pensioners to increase their disposable income?

RS: A good rule of thumb around how much annual income a pension can provide is roughly 4 per cent of the total amount.

When it comes to drawdown, our research shows that the less a pensioner withdraws the better it could be for them in the long-term, because their money has more of an opportunity to grow.

Therefore savers should consider whether they want to withdraw the full 25 per cent tax-free cash or whether it is better to make smaller tax-free withdrawals on demand.

As the state pension can’t usually be taken until around a decade after workplace or personal pensions, there’s a chance that some people might not need to access it immediately upon reaching the age of 66.

If a saver has a retirement income from other sources or is still working, it could be to their financial benefit to defer receipt of the state pension.

Delaying the State Pension by just a few weeks could result in a higher weekly State Pension amount, or even a lump sum payment.

As with all pensions, timing is everything and I would encourage savers to only withdraw what they need, at the time they need it, in order to ensure their money lasts well into retirement. The longer a saver can afford to delay, the more they are likely to receive in later life. 

FTA Are there any connections to be made between Brexit and the current instability of retirement planning? 

RS: The UK's decision to leave the EU has, and will continue to have, implications for pension schemes. Recent market volatility (caused by Brexit and the coronavirus pandemic) has made retirement planning difficult for savers close to or already in retirement.

Some pensioners are finding themselves living off a much lower income than they envisaged. Fortunately, markets now seem to be recovering.

Brexit appears to be having a negative impact due to labour shortages.

We are still learning about the implications of Brexit on the long term prospect of retirees. But in some instances, British retirees who chose to live abroad have had their State Pension frozen. 

This action effectively means these pensioners will not see their pension increase in line with the UK (who under the Triple Lock system, ensure UK pensioners receive an increase each year by the highest of the following: 2.5 percent, inflation, or average earnings growth). 

This policy is intended to safeguard the future of the State Pension and ensure all eligible older people receive a payout, but those living abroad now face losing out on this benefit. 

In some sectors, Brexit appears to be having a negative impact due to labour shortages. This coupled with the pandemic, has seen a reduced number of retail and hospitality workers, which could impact on company profitability. 

However the government is committed to making the most out of Brexit. So to the extent areas of bureaucracy are sensibly cut, the impacted sectors could benefit positively.

FTAdviser: Can we expect any big changes from the government over pensions in the next couple of years, or will they remain stable?

RS: Following the pandemic, the pressure is on for current and future governments to deliver policies that balance public finances.

The chancellor has already made some notable decisions such as freezing the Lifetime Allowance for pension contributions at just over £1m for the remainder of this Parliament, instead of increasing in line with inflation. 

[At the time of writing, plans have been leaked that suggest the chancellor might even reduce the LTA and make tax changes to pensions later this year to help plug the Covid-19 economic hole].

RS: Look, as we look towards an uncertain future, this could realistically pave the way for significant changes in pension policy. Certainly at PensionBee, we would welcome a reform of the pension tax relief system, as it is not currently fit for purpose. 

The introduction of a flat rate of pension tax relief would benefit the hard-working savers who continue to not receive enough, while, at the other end of the spectrum, benefitting higher and additional-rate taxpayers, who are likely to be missing out on approximately £1bn in unclaimed tax relief each year by not completing their self-assessment. 

The dual system is too complex and radical reform is long overdue. A universal rate of 25-30 per cent will level the pensions playing field and put a stop to savers across all tax brackets missing out. 

Joy Brooks-Gilzeane is an intern with FTAdviser