I want to access my pension but the markets have spooked me, what should I do?
I’m 65-years-old and thinking of accessing my pension in about 12 months’ time. However, I’ve been slightly spooked by markets recently, which knocked about £10,000 off the value of my pension. What should I be thinking about and doing before withdrawing my money?
Tom Selby, AJ Bell Head of Retirement Policy says:
If you have a defined contribution (DC) pension pot and are planning to access it in the next 12 months, you should already have thought about your retirement income plans. If you haven’t, don’t panic – but don’t stick your head in the sand either.
The first thing to do is ask yourself whether you really need to access your pension at all. Because pensions benefit from generous tax treatment on death, it can make sense for this to be the last asset you touch.
What’s more, taking taxable income from your fund will reduce your annual allowance (the amount you can pay into your pension) from £40,000 to just £4,000. This is important if you decide you want to make additional pension contributions in the future, as you won’t be able to benefit from tax relief on anything over £4,000 a year.
The later you are able to wait before accessing your pension, the greater annual income it will be able to deliver too.
Of course, if you need to access your pension to provide a retirement income that is what it’s there for but it’s worth asking yourself this fundamental question.
If you are intent on accessing your pension, the next thing to consider is how you want to generate an income. If you are using your entire pot to buy an annuity, you should already have shifted your fund into cash.
If you haven’t, you should consider doing this – otherwise your retirement prospects will be a hostage to the fortune of short-term market movements. There is no other way to ‘freeze’ your pension pot and lock-in its value while it is still invested. While your fund is in the stock market it still has a chance to grow over the long term, but in the short term it could fluctuate in value significantly.
If you do look at an annuity it’s worth remembering that the older you are, the better the annuity rate you will be able to get from an insurance company. You should also disclose any health or lifestyle factors – including how much alcohol you drink or if you smoke – which could improve your rate.
If you’re planning to cash in your entire fund then you should also be invested mostly in lower risk assets, again so you have a clear idea what you will get when you come to withdraw the money. Anyone going down this road also needs to consider the tax implications, as well as the sustainability of their withdrawal plan.
If you plan to keep your fund invested via drawdown, it is possible that your investments won’t need to change at all. A healthy 65-year-old could live for 30 years or more in retirement – meaning their investments have plenty of time to grow even as they are taking an income.
For someone in this position, a little bit of short-term market volatility such as we’ve seen recently shouldn’t be a major cause of concern.
However, large withdrawals in the early years of retirement combined with big market falls could have a seriously detrimental impact on the sustainability of your plans. This is one reason it’s important to keep your strategy under regular review and be prepared to cut back if necessary.
If you’re going down this road you should consider shifting some of your investments into cash to pay your income. Usually anywhere between 12 to 24 months’ expenditure is about the right level.
You should also consider whether your investments are aligned to your retirement plans, both in terms of risk and what they are trying to achieve. Given the aim of the game at this point is usually generating an income, picking stocks or funds aimed at producing a steady income is a common approach.
If you want help navigating your retirement options, consider speaking to a regulated adviser. It’s also worth visiting Pension Wise, an independent service set up by Government, for guidance on all things pensions.
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