Blog

The pandemic and resulting global recession has many people exercising greater discretion with their finances—and for good reasons. Pensioners without a guaranteed income, in particular, are more prudent with their retirement planning and spending less in anticipation of more difficult times. 

Over the past 12 months, pensioners with drawdown schemes have been taking an average of 4.7% of their pot, a significant decline from the 6.4% average of the year prior. Analysts say this must be perceived as a positive, especially since it is a clear sign of level-headedness in financial thinking. It is a sensible response to a market currently in flux.

The implications on the market

Many industries have been hit hard by the pandemic. Unemployment has skyrocketed in the wake of all this, and the market is so unstable that it is difficult to predict what will happen in the short term. This uncertainty poses great concern for pensioners and their funds. 

It is generally difficult for a pension fund’s capital value to recover from stock market falls and recessions such as this one, especially if withdrawals increase or remain at the same level during the economic downturn. The more money is withdrawn, the less capital will be available to stimulate new growth when the markets begin to recover.

Financial professionals refer to this phenomenon as “pound cost ravaging,” especially as economic downturns seem to affect pension funds more than others. It is definitely something to take into account when planning your retirement.

What about those who can’t afford to reduce their withdrawals?

Depending on your needs and lifestyle, it might be difficult to reduce the size of your withdrawals. For those with defined benefit arrangements and state pensions, you are free from worry, as these are generally unaffected by fluctuations in the stock market. 

You might consider having a conversation with your pension provider to transfer a significant amount of your pension into cash, gilt, or bond. These are less risky in times of economic instability, so they will take less of a hit. However, not all pension schemes offer this, so you might want to look at what type of funds your pension is invested in. 

If your pension is in shares, don’t panic. Markets will recover eventually, given enough time. You will just have to carefully manage your living expenses during this time to have enough left over when market prices go back up.

There are also quite a few markets that have profited and spiked during the pandemic. If you are comfortable taking the risks of investing in industries such as gold or e-commerce, why not? You might just be able to convert some of your pension money into something more valuable. 

Final thoughts

There will always be highs and lows in the economy. Though sometimes the market may take unpredictable paths, you and your pension can survive any economic downturn with enough shrewdness and discipline. 

If you need help with retirement planning in Cardiff, send us a message at Harry Robinson Wealth Management. We put you and your goals at the centre of everything we do to help you realise a brighter financial future. 

References

1. Unbiased. https://www.unbiased.co.uk/news/financial-adviser/retirees-take-extra-care-with-pension-withdrawals. Accessed on 24 September 2020. 

2. Which. https://www.which.co.uk/news/2020/09/coronavirus-how-to-protect-your-investment-portfolio/. Accessed on 24 September 2020. 

*Will writing and Powers of Attorney involve the referral to a service that is separate and distinct to those offered by St. James's Place and along with Trusts are not regulated by the Financial Conduct Authority.