As investors recently watched the value of their hard-earned savings tumble overnight, it gave rise to fear and panic. Younger investors have time to recover their losses, but what about those already in retirement, and particularly clients who need their pension savings for an income? Here we discuss some simple things you can consider in order to protect your future retirement income.
If you have been taking a flexible income from a drawdown product over the last few years, or were planning to start taking an income shortly, this market crash will have come as a terrible shock. Since the financial crisis in 2008, many drawdown customers have enjoyed making regular withdrawals, while watching their remaining savings continue to grow. But for people who have sustained large losses to those remaining pension savings in recent weeks, it could now be feeling like something of a lost cause.
Understandably, this is a worrying time for people at, or approaching, retirement. But there are some simple steps you can consider which will minimise the impact on those savings, and to stop making a bad situation worse. Here are our top three tips, but please do discuss these with your financial adviser or wealth planner in the first instance, as they won’t be suitable for everyone:
1. Minimise the amount of income you are taking
Every time you take income from your pension savings, you are cashing in a finite number of units. With the recent market crash, you are effectively locking in the losses of the past few weeks because you will need to cash in more units to get your usual amount of income. These units will therefore never recover their value should markets rise. So now is a really good time to tighten your belt as the less you withdraw, the more units remain in your pension, and the easier it will be for your pension savings to recover with the markets.
If you can’t reduce your expenditure, but have sufficient savings in cash, you might want to consider dipping into them instead.
2. Guarantee essential expenditure
If you don’t have any guaranteed retirement income, other than the State Pension, you might want to consider talking to your adviser about whether now is the right time to buy an annuity, for example. A cash lump sum will buy you a guaranteed level of income for life, which will ensure you can pay your bills and buy food. The level of income you get will vary depending on your requirements. You can link it to inflation so that it grows over time, and if you have a health condition you might qualify for a better rate. Annuities have gone out of fashion since the flexible pension rules were introduced in 2015, but they still have their place – even if it’s just to ensure you have guaranteed income which can cover your basic expenses. The rest of your money can remain invested so it can grow and recover, and you can withdraw this money only when you need it.
3. Review how your pension savings are invested
If it has been a while since you reviewed your investment strategy with an adviser, now could be a good time to give them a call. Apart from discussing the best way to recover some of your losses, and avoiding locking in those losses, an adviser can make sure your withdrawals are as efficient as they can be. In the industry we call this ‘sequencing risk’. In other words, you are better to withdraw money from less risky and volatile assets, so that in the event of a market downturn, you will be cashing in fewer units than if you are withdrawing from a riskier fund that may have taken a bigger fall in value. You might also want to consider ways to reduce your investment costs, but this is a conversation you should have with your wealth planner or financial adviser.
As professional investors, we will be carefully analysing businesses to better understand how likely they are to survive this crisis. Until we get a better idea of how long the global lock down will last, and what the outlook is for the coronavirus and a possible vaccine, we expect there to be further market volatility. We’ll therefore be avoiding companies that have large amounts of debt and will continue to focus on businesses that have strong balance sheets and are most likely to ride out the storm. We will also be keeping a keen eye on the repercussions of the unprecedented level of fiscal bailout, particularly the impact on inflation.
So, we can expect difficult times ahead. But rest assured we are working hard to protect portfolios and position them to take advantage of the market reprice for longer term growth opportunities. In the meantime, it’s important you review how and why you are accessing your pension savings. If you have any concerns about your retirement income, speak with your financial adviser or a Sanlam wealth planner to discuss ways you can minimise the impact of this uncertainty. Ultimately, we are here to answer your questions, talk you through your investments and help you look forward with confidence.
The information and opinion contained in this article should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any expressions of opinion are subject to change without notice.
Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.