Post-COVID-19 retirement planning: should I reconsider my retirement plans after COVID-19?
While the long-term effects of COVID-19 pale in comparison with the immediate loss of human life, we have been considering the effects of the disease on our clients in the future, particularly your plans for retirement. The pandemic has wrought many changes (not all of them bad) and accelerated other existing factors.
For example, you may have:
- Enjoyed being at home and are now considering retiring, but don’t know whether you have put enough aside to fund your retirement
- Decided you need to keep working for longer because the crisis has reduced your pension pot
- Recognised that working from home, or flexible hours, could offer a way to stay on at work without the stress of commuting
- Realised you don’t know how the pandemic has affected your pension and that you now need help to understand what you can expect in retirement.
How has the pandemic changed the face of retirement planning?
The concept of 'retirement’ has changed. The idea that we stop working at 65 and then spend our time playing golf and walking hand in hand on beaches is now anachronistic and probably ageist.
The nature of work has also been evolving, especially for the UK population, over the last 50 years. However, since lockdown began, many of those ongoing developments have been fast-tracked for immediate use. Particularly the way people work or move from one mode of work to another.
The pandemic has forced us all to reconsider our plans. Many of us have now become used to working at home, releasing us from exhausting commutes and early mornings. At the same time our pension pots have probably fallen in value and returns are low, so the idea of working part time to supplement a pension has become more attractive and possibly essential.
Due to successive Government interventions, we now have less ability to invest into pension funds tax efficiently, and are less likely to accrue pension benefits as previous generations have done.
In addition, the state pension will be paid later and later in life, so continued working and proper planning will be needed to ensure we can still live the life we want.
Will my future pension returns and income be affected by the coronavirus pandemic?
Almost certainly. All pension schemes rely on investments of one form or another to produce the returns required to pay income. While the pricing mechanism of investments is a product of many factors (investor sentiment, sector specific factors, and the relative valuation of one investment to another), longer-term growth depends on the continued profitability of companies and the return of those profits to shareholders.
Because of the pandemic, we are currently in a challenging economic period. The global economy has taken over 10 years to recover from the shock of the last financial crisis. Now it has been presented with another that will take a considerable time to work through. Generally, we should plan for lower returns, which means we need to take a much more cautious approach to our finances and planning.
As wealth planners, we understandably err on the side of caution when advising clients. Now is no different. For example, if your retirement plan relies on a compound growth of 7% per annum, you will need to review that and look at other scenarios. It still may be possible for you to do what you wanted, but if you have to make changes, it is better to reassess your plans sooner rather than later.
Will I need to keep earning money for longer?
As mentioned above, the value of your pension pot has probably fallen, and it may be harder to get returns, so you may need to build up more savings before retiring. We are also living longer and staying healthier for longer. So working for longer may now be a necessity if we are to enjoy a comfortable, healthy retirement.
More flexible working conditions could enable you to work fewer hours, giving you time to do other things; perhaps other work – less well paid but more enjoyable. You could take sabbaticals to travel; do charitable work or creative projects. Still continuing to earn, and share your knowledge and experience.
How much longer will I need to work?
The facts about longevity are incontrovertible.
I was born in 1971. My average life expectancy at birth was approximately 67, while I was expected to retire at 65. To put that in context, I would have had to fund just two years of retirement had things remained the same throughout my life.
Females born in the same year had a life expectancy at birth of 75 and were allowed a lower pension age of 60 – this is gradually being equalised.
I am now approaching my 50th year. The Office for National statistics has a calculator which lets you know how long you are going to live. Here’s my chart:
As you can see, I am now expected to live until I am 84. In the space of the 50 years or so that I have been alive my life expectancy has increased by 25%. An extra 17 years on this planet.
This highlights one important change facing all of us.
Will the government continue to raise the official retirement ages?
Over the last few years government policy has changed, and my official retirement date has been increased to 67. This is likely to be a continuing trend and makes perfect sense.
The state pension was introduced in 1925, and since then the pensionable age has stayed much the same, only recently starting to rise. However, the number of people entitled to claim has increased, and longer life spans mean the time over which they claim has increased significantly.
The UK government pays for the state pension out of tax receipts. Thanks to the massive deficit accrued by the government during lockdown, there will be no spare tax income to support state pensions. So a younger generation, proportionally even smaller than now, will have to support a lot more people in retirement.
What return do I need to achieve for a reasonable retirement income?
Many people believe they need a return of 5% for their retirement income. However, if we are now entering a period of lower returns but also lower inflation, this level of income may not be needed – or achievable.
To give you some guidance, currently a man retiring at 65 in good health would get an average rate of about 4.6% as a level annuity and 3.8% for one that rises in line with inflation.
How we can help
We are experiencing uniquely challenging times, and those challenges are likely to continue.
If you are drawing a retirement income now, or thinking about retirement, you should be considering all the possible scenarios for the future – given the potential for a long recession – and planning and structuring your wealth accordingly.
Proper planning is a vital way to mitigate some of the pandemic's effects. Identifying problems early, changing what needs to be changed or simply having the peace of mind that you are still on track, despite all that is going on around us, will prove invaluable.
If the pandemic has affected the way you earn, or had an impact on your plans for retirement, you may feel you would benefit from talking to one of our experts about issues that are concerning you. If so, please contact us or call us on +44 20 7523 4500.
We can help you look forward to a more flexible future.
If you would like to read more about planning for the post-COVID-19 world:
- What do I need to know about care homes and care costs?
- Should I start saving extra for long-term care at home?
- What can I do to mitigate any tax rises after COVID-19?
- How can I use my wealth differently in a society being changed by COVID-19?
- How will COVID-19 affect women's financial prospects?
Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.
The tax treatment of all investments depends upon individual circumstances and the levels and basis of taxation may change in the future. Investors should discuss their financial arrangements with their own tax adviser before investing.
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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.