12 May Retirement planning amid the COVID-19 pandemic
You have been looking forward to starting a new phase of your life in 2020 as your retirement date approaches. You had ideas for ticking items off your bucket list. But now you’re worried about your retirement planning amid the COVID-19 pandemic.
Not only has the end of your working life been upturned, but your pension fund’s value has dropped by 20%. Panic sets in as you wonder whether you will have 20% less income for the rest of your life. Also, if you leave the funds invested to allow the investments to recover, where will you get an income from? You may also have planned to use some of your tax-free lump sum to settle your bond or other commitments.
How can you salvage your retirement planning amid the COVID-19 pandemic?
There is already a lot of change going on in your life and the current market and economic crisis will only intensify that. The first thing you need to do is recognise that any change is stressful, and you need time to adjust. Your finances are very important. They need purposeful and deliberate time and attention from you – your financial future depends on it. It may take a while, but you need to allow them to recover.
What happens to your retirement fund when you retire?
When you retire, you have the option to withdraw a portion of your fund in cash. Some or all of it will be tax free, and the balance of your investment will be transferred to a new account, which needs to provide you with an income.
Tax-free lump-sum options
A good pension fund investment will be diversified and comprise different types of investments. Some of them will have fared better than others in this market volatility. To avoid taking cash from a portion of your capital that you need to leave to recover, you could consider taking a ‘carve out’ of the portion of your fund that has held up (e.g. cash). By then adjusting how you invest what is left in your living annuity to exclude the allocation to cash you have just withdrawn as a tax-free lump sum, you can maximise your recovery opportunities.
Providing an income
A similar approach could also be taken to source the monthly income you need once the balance has been transferred. This will provide an income where appropriate.
Risk and return
If you meant to decrease the risk/return of your pension investment as you move from accumulating to spending, but didn’t get around to it before the latest market compression, don’t change it down now. Rather consider allowing it to recover and change it down later.
A cool head and a sensible strategy will help you navigate this time of uncertainty without you having to predict the future.