A financial adviser's view – how to retire in uncertain times

If you’re planning to retire in the next year or so, you might feel like the rug has been pulled out from beneath your feet.

If the coronavirus pandemic has shaken your confidence in your plans, there are ways you can get back on track or you might even need to tweak your strategy.

Just because we’re seeing market volatility, the basic principles of retirement planning shouldn’t change. It’s not just looking at what you have and perhaps what you’ve lost in the last few months – it’s looking at what you need.

This article is not personal advice. If you’re unsure if a course of action is right for you, you should consider seeking financial advice. What you do with your pension is an important decision that you might not be able to change. You should check you're making the right decision for your circumstances and that you understand all your options and their risks. The government's free and impartial Pension Wise service can help you and we can offer you advice if you’d like it.

Getting ready for retirement

Start by looking at 3 things:

1. Establishing what you need and want
2. The factors you can’t ignore
3. The options and their pros and cons

Establishing what you need and want

You’ll no doubt have thought about how you want to live your life and how you want to spend your time in retirement.

First and foremost we must consider how much income you’ll need to cover your living costs. Remember to include your entitlement to your state pension, and if you haven’t already, consider getting a state pension forecast as soon as possible. Entitlement to the full state pension gives you just over £9,000 a year and if you’re a couple that’s over £18,000. This could go some way in covering the essential income you need, but remember the amount you get from any state entitlement could change in the future.

In addition to this you’ll look at discretionary income. This is to cover the type of lifestyle you want to have in retirement. While the recent market falls might mean that you need to make a few changes in the short term, these unusual times won’t last forever. Then once things become a bit more normal you could then start to think about increasing the income you want in the longer term. As ever, we think taking a long term view is always the best approach.

Next consider any lump sum or capital requirements you might have. These are things like an outstanding balance on a mortgage, renovations to your home or helping children onto the property ladder.

It’s a very individual process focussed on where your priorities lie. For example, for some it might be to leave a legacy to loved ones, so you might wish to look at estate planning as well.

Five factors you can’t ignore

During the planning process there are five universal factors that can have a big impact on your plans regardless of the current climate.

1. Longevity – it’s common that we underestimate our own longevity. The implication of doing this is that you could run out of money before you run out of time.
2. Inflation – we know inflation is low and has been for some time but you might recall the 70s and 80s when inflation was much higher. When inflation is higher it reduces the future spending power of money. So when it comes to longer term planning your buying power against inflation needs to be factored in.
3. Your health – your current health could affect the options you choose. But later down the line things could slow down. Your health could change which brings about the potential of long term care where additional income or capital might be required.

4. Tax changes – we know legislation and tax rules can change, so being flexible in your retirement planning is very important.

5. Investment risk – in light of the current pandemic we’ve seen a lot of ups and downs in the stock market. It’s important not to have a false sense of security that markets will steadily rise for years to come but to consider the ‘what ifs’.

What are the options?

When it comes to choosing how you’ll generate income in retirement it’s all about your attitude to risk.

The first option is a guaranteed solution. By using an annuity, your income is guaranteed. It doesn’t matter what happens to the markets or if you live to 110 years old, your income will be paid for life.

You can choose certain options so your income increases along with inflation or your income can continue after you die. If you have health issues you could get an enhanced rate too. But the downside of this option is that you usually can’t change your choice if your situation changes. If annuity rates rise in the future you won’t benefit from this if your annuity is already being paid.

The second option is a risk based solution. Income drawdown, for example, which is all about flexibility.

Using income drawdown means keeping your capital invested in retirement, so you’re able to withdraw as much or as little as you need when you want to. It also means you can pass money on to loved ones which can be paid as a lump sum or as beneficiary income.

The risk is your income isn’t secure, you could run out of money if you withdraw too much, your investments fall or you live longer than expected. Would what has happened in the last few months affect your standard of living? How much can you afford to lose if the markets dropped like they have while you draw an income?

You don’t have to choose just one of these options. If you’d like the flexibility of drawdown as well as the security of an annuity you might want to have a mix of both.

Find out more in our recent webinar on how to plan for retirement

Talk through your retirement plan with a financial adviser

You can book a call with an HL adviser to get help understanding how these uncertain times could affect you in the lead up to your retirement.

My colleagues and I offer free 30 minute telephone conversations during which you can ask us about anything you’re unsure of. We won’t provide you with personal advice on this initial call but if this is something you wish to pursue we can talk you through the services we offer.

That way you can hang up either feeling confident you’re already doing everything you can in preparation for retirement, or knowing that financial advice is available if you need it.

There’s no obligation to take advice at this stage, but if you do, there will be a charge which we’ll explain.

If our advisory service isn’t for you, we’ll offer further information to help you make decisions for yourself – it’s your call.

Book your call