CoronavirusJun 18 2020

What will retirement income look like after the pandemic?

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Scottish Widows
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Supported by
Scottish Widows
What will retirement income look like after the pandemic?

Managing your retirement income at a time of great crisis is not an ideal solution but it is the stark reality facing many people.

In the first three months of this year, the average annuity income fell by 6 per cent - its lowest level on record, while those saving for retirement saw their pension funds severely hit, according to data from Moneyfacts.

The impact of the coronavirus pandemic on the global stocks markets has resulted in the average pension fund value falling by 15.2 per cent during this period, its worst quarterly performance on record.

At the time the data was released at the end of April, Richard Eagling, head of pensions at Moneyfacts, says: “Whether it is individuals saving into a pension scheme or currently in drawdown, or retirees looking for the security of an annuity, the coronavirus pandemic has had a devastating impact on potential retirement outcomes. 

“The hope is that these will prove to be short-term shocks, but for those planning for retirement now and looking for a retirement income immediately, they present unenviable challenges.”

So where now for those who are thinking about their retirement?

A recent study by Aegon found that as a result of the crisis, 18 per cent of the general population now plan to delay retirement.

One in eight (12 per cent) of those aged 55 and over who prior to the coronavirus crisis had not accessed their pension funds have now done so and a further 8 per cent have considered dipping in. 

And despite being decades away from retirement age, one in five (21 per cent) of those aged 18-34 expect to delay the age of retirement, while 11 per cent of those aged 35-55 said that they plan to delay retirement.

Vince Smith-Hughes, director of specialist business support at Prudential UK, says: "We may have enjoyed a significant bull run in markets since the introduction of pension freedoms and the popularity of drawdown vastly increased, but the recent falls in markets have had a significant impact on client fund values even when you take into account the gains we’ve seen over the last few weeks."

Retirement fund

For some people the pandemic will not have created any issues; for example members of final salary schemes for instance, and others with well-funded pension and investment accounts. 

Those who have been chasing dividends rather than a total return strategy may be feeling the pinch for a while Dennis Hall, Yellowtail Financial Planning

But those people whose property portfolio is their pension may be feeling less secure if they have been asked for rent holidays, while individuals who saw their business as their pension, will be facing a retirement with potentially less money, or delayed until they can sell.

Dennis Hall, chief executive of Yellowtail Financial Planning, says: “There’s a lot of uncertainty depending how you’ve been preparing for retirement. 

“Those who have been relying on a pot of money - pension fund, Isa, portfolio - to provide their pension income may need to look at what basis they’ve been investing and withdrawing ‘income’. Those who have been chasing dividends rather than a total return strategy may be feeling the pinch for a while.”

Mr Smith-Hughes recommends that for those in drawdown, an assessment of the sustainability of income should be undertaken, using a cashflow modelling tool, based upon current values and income levels.

Depending on the result it may be necessary to reconsider the income level being taken, which may or may not be straightforward. If the client is fully invested and needs that level of income then options may be limited. 

“It’s important to remember that income needs could also be affected by the current situation as people may be spending less for a little while and that could help to ease the pressure on income requirements,” Mr Smith-Hughes adds. 

“Annuities, the main alternative to drawdown, should always be a conversation advisers have with clients, both at the outset when starting to take income but also when reviewing an existing drawdown. 

“With fund values and also annuity rates at low levels this may seem unattractive, but is still an important step to consider as it’s not an all or nothing scenario. And of course, any change in the client’s health should be ascertained as this can clearly have a big impact on the rate available.”

While Covid-19 has most definitely had an impact of asset values, Gary Smith a chartered financial planner at Tilney, says this does not necessarily mean that retirees need to amend the income they take from their pensions.

“Like most of the population, retirees will have faced lockdown and isolation restrictions, and this will most likely have resulted in a reduction in their regular expenditure, especially as travel and social expenditure will have reduced,” Mr Smith adds. 

“Therefore, it could be that, rather than needing to retain the same level of income, they can reduce the income they need to reflect their reduced expenditure. 

“After all, the surplus income would probably end up being retained in savings, at a time when interest rates are low and retaining capital in their portfolios, as asset values recover, could be more beneficial.”

Taking income less regularly

He also suggests that some clients opt to take their income annually or as lump sums and, as an alternative to taking this at the start of the tax year, they could benefit from converting to taking monthly income, as this would reduce the potential impact of  ‘negative pound cost averaging’, potentially enabling the investment values to recover.

Mr Smith says: “Where retirees do have surplus savings, it could benefit them to stop withdrawals from their pension/investments, and simply draw down on their savings for a temporary period of time.”

The use of lifetime cashflow planning can assist in calming retirees’ fears regarding the sustainability of maintaining their long term expenditure requirements. 

Although many will have seen falls, in excess of 10 per cent, within their pension and savings, it is often difficult to quantify the actual impact of these falls. 

However, by using a cashflow system, Mr Smith explains that an adviser can illustrate what impact the recent falls will have on their long term asset values.

“Indeed, as part of a cashflow planning exercise, most advisers will include some level of ‘crash test’, usually in line with the level of risk taken, to illustrate the impact that a market crash would have on their incomes and portfolio values,” Mr Smith adds. 

“This prepares retirees for the recent falls we have experienced, and enables them to see through the ‘short term’ pain with a longer term plan in place.”

So individuals who have been holding more cash reserves may be be feeling some small comfort at this time.

Toni Sheen, a director at PI Financial says: “With a few of my clients, I have encouraged them to stop taking money out of their pensions and live off their savings and if their savings allow them to do that because that really is a better way to live.”

Rebecca Aldridge, managing director of Balance Wealth UK, adds: “Advisers who build strong contingency plans, including a good cash buffer for emergencies have proven themselves in the last few months. 

“We have reduced income withdrawals for most retired clients during the last few months and they have comfortably turned to their cash buffer, knowing that’s what it’s there for. Advisers who haven’t operated with a good cash reserve in the past might be inclined to do that more now.”

For most retired clients their biggest expenditure is on travel, and everyone I’ve spoken to is itching to get back on their flights, cruises and so on Rebecca Aldridge, Balance Wealth UK

At her firm, Ms Aldridge says some of her retired clients have seen a slowing down to their normal pace of life since the pandemic and they have liked it.

Their spending is down considerably and that could continue even as the pandemic eases, although many of them miss being able to travel.

Ms Aldridge adds: “For most retired clients their biggest expenditure is on travel, and everyone I’ve spoken to is itching to get back on their flights, cruises and so on. 

“So spending levels in retirement I think will by and large remain the same as they were before the crisis.” 

Scott Gallacher, director at Rowley Turton Private Wealth adds: “Our approach will not fundamentally change in terms of how we work through things.

“There is the possibility that returns in the future will be lower; negative yields are low, inflation is lower and interest rates is lower. That may change how we structure solutions for clients ...and clients may have to accept a lower level of retirement income.”