Stick with your pension plan
Experts say ‘Don’t panic’ – and predict annuities will become popular again
OUR ability to build retirement wealth through saving into a pension faces a multitude of challenges in the wake of the country’s decision to vote to leave the EU.
Long-term savers saw their pension funds slide in value in response to Friday’s sell-down in shares – in the UK, Europe and across the globe – compromising their retirement prospects. And the future security of benefits that millions of workers have built up inside attractive company pension schemes could be jeopardised, especially if low interest rates persist, stock market volatility continues and the economy totters on the edge of recession.
Many people on the cusp of retirement also face key questions on whether to opt for the security – but poor value – of an annuity or to keep their pension fund invested and take income under the pension freedom rules introduced in April last year.
Tom McPhail, head of retirement policy at fund broker Hargreaves Lansdown, says: ‘Brexit presents some immediate risks and uncertainty for our retirement income. But there are opportunities for longterm investors too.’
Here are the key issues for pension savers to consider:
DEFINED CONTRIBUTIONS
STOCK market falls are most disconcerting for people who save in new-style defined contribution pension funds. This is because they can immediately see the impact of such market slides on the pension fund they are painstakingly accumulating – most people now have online access to their pension, enabling them to see how it is progressing or regressing.
A majority of workers contribute to such plans – either through schemes offered by their employers or personal pensions if selfemployed. Under such arrangements, the retirement income that someone can eventually draw from their pension fund is dependp ent upon three e factors: the fund’s investment stment performance; the amount that at someone (and d their employer) is prepared to contribute into the plan over their working life; and if they buy the security of a lifetime income at retirement, prevailing annu- ity rates.
McPhail says ays investors with such pensions should d not be panicked by last ast week’s stock market falls – or by further share price weakness in the coming weeks. He says: ‘We are likely to experience a period of sustained volatility in the markets and uncertainty in the wider economy.
‘In these conditions, acting in haste is unlikely to serve you well. If you are still years from retirement and making regular savings, then just keep going. Remember, falls in the market mean that you can buy investments in your pension fund at a lower price. In most cases, the best pension strategy is to keep calm and carry on.’
Reviewing where your money is being invested inside your pension makes sound financial sense. A diversified investment strategy is best – across investment funds, markets and assets. Many schemes offer default fund options which are often invested across a variety of assets or lifestyle funds designed for people of a particular age. These can be sound options.
Steven Cameron, pensions director at financial services giant Aegon UK, says: ‘Our key message to pension savers is ““don ’t pa panic”. If you hav have a defined cont contribution or person personal pension, you have to accept it will be affect affected by stock market movements.’ For those on the cusp of retirement, the current mix of market uncertainty and low interest rates makes the decision on how to convert a pension fund into retirement a difficult one. Until recently, most people converted their fund into a regular retirement income through the purchase of an annuity. But poor rates have dissuaded many from pursuing this route. McPhail says a 65- year-old would today get a lower annuity rate than a 60-year-old would have obtained just six months ago. New pension freedom rules, introduced in April last year, have also encouraged many retirees to keep their pension fund invested, drawing down income when they need it. Billy Burrows, of William Burrows Annuities, is a longstanding pension annuity expert. He predicts that annuity rates will continue to fall but he believes some pension savers may now prefer the certainty of an annuity in an uncertain economic, financial and political world. He says: ‘Pensioners taking an income from an invested pension fund face a potential double whammy – a falling fund value further depleted by income withdrawals. I predict a slow but sure resurgence in the popularity of annuities.’
Those who opt for an annuity should shop around for the best – and most appropriate – annuity that takes into account any health issues and financially protects their spouse. Prudential’s withdrawal earlier this month from selling annuities in the open market has compromised choice.
DEFINED BENEFITS
MOST defined benefit company pension schemes in the private sector are now ‘closed’ which means workers can no longer contribute to them. Such arrangements, commonplace in the public sector, are viewed as deluxe because they pay pensions based on a combination of years worked and a worker’s final salary at retirement – or career average salary. Yet many schemes are under
wa water, with insufficient assets to meet all their liabilities, fuelling concerns that some will not be able to pay the pensions promised.
Latest data from the Pension Protection Fund – which mops up stricken pension funds – indicates that company pension schemes are in deficit to the tune of £300billion.
With low interest rates now certain to prevail for the time being, and the danger of an economic slowdown, the outlook for some company pension schemes is bleak. McPhail warns: ‘The upshot could be a need for companies to do more deals to reduce benefit levels.’